The Clock is Running | Why Now May be the Time to Make a Roth IRA Conversion

Roth IRAs offer significant financial and estate planning benefits. If you have a substantial balance in a traditional IRA and are considering converting it to a Roth IRA, there may be no better time than now. The Tax Cuts and Jobs Act (TCJA) reduces individual income tax rates through 2025. For those making the conversion now, the TCJA both enhances the benefits of a Roth IRA and reduces the cost of converting.

Roth IRA estate planning benefits

The main difference between traditional and Roth IRAs is the timing of income taxes. With a traditional IRA, your eligible contributions are deductible but distributions of both contributions and earnings are taxable. With a Roth IRA, on the other hand, your contributions are nondeductible — that is, they’re made with after-tax dollars — but qualified distributions of both contributions and earnings are tax-free.

Generally, from a tax perspective, you’re better off with a Roth IRA if you expect your tax rate to be higher when it comes time to withdraw the funds. That’s because you pay the tax up front, when your tax rate is lower.

From an estate planning perspective, Roth IRAs have two distinct advantages. First, unlike a traditional IRA, a Roth IRA doesn’t mandate required minimum distributions (RMDs) beginning at age 70½. If your other assets are adequate to meet your living expenses, you can allow the funds in a Roth IRA to continue growing tax-free for the rest of your life, multiplying the amount available for your loved ones.

Second, your children or other beneficiaries can withdraw funds from a Roth IRA tax-free. In contrast, distributions from an inherited traditional IRA are, with certain exceptions, taxable, and, depending on the circumstance, could saddle the recipient with a sizable income tax bill.

Why now?

The TCJA’s tax changes may make it an ideal time for a Roth IRA conversion. As previously discussed, Roth IRAs offer tax advantages if you expect your tax rate to be higher in the future.

The TCJA temporarily lowered individual income tax rates, which means that there’s a good chance that, all else being equal, your tax rate will increase in 2026 (unless a future Congress lowers tax rates). Plus, if you’re in a position to fund your future needs from sources other than your IRA, converting now, with relatively lower tax rates, is a good idea.

When you convert a traditional IRA to a Roth IRA, you pay taxes (but not penalties) on the amounts you convert, to the extent they’re attributable to deductible contributions and earnings on those contributions. You’ll be able to keep the funds in a Roth IRA, which avoids RMDs and allows the full balance to continue growing tax-free.

One good strategy for softening the tax blow is to do the conversion gradually between now and 2026. This allows you to spread the cost over seven years. Also, by reducing the amount converted in a given year, you minimize the chances that the income generated by the conversion itself will push you into a higher tax bracket.

Proceed with caution

If you’re contemplating a Roth IRA conversion, be sure to discuss the costs, benefits and potential risks with your advisor. It’s important to be cautious because, once you convert a traditional IRA to a Roth IRA, you’re stuck with it.