Roth IRA Conversions after the OBBBA

Tax News You Can Use | For Professional Advisors

Jane Ditelberg, Director of Tax Planning
Bryan Dorsey, Associate Wealth Advisor

September 22, 2025

Earlier this year, many taxpayers considered converting their traditional retirement accounts to Roth IRAs.¹ There were several reasons for this, including the possibility of rising individual income tax rates if the Tax Cuts and Jobs Act (TCJA) rate cuts were to sunset at the end of 2025, and because volatility in the market had depressed the value of certain portfolios, reducing the amount subject to tax. Both of these would reduce the tax cost of a conversion.

In the wake of the OBBBA, however, there are some additional factors to consider to determine whether and when to pursue a Roth conversion. On the one hand, the existing lower income tax rates were extended and indexed for inflation. For those who would otherwise qualify for one of the income-limited deductions, such as the increased deduction for state and local taxes (SALT), the additional deduction for overtime pay or the deduction for those over 65, the additional taxable income from a Roth conversion may make a taxpayer’s income too high to qualify.² In that case, the taxpayer may be better off converting smaller portions of their retirement account to a Roth over several years. Alternatively, it may be advantageous to defer the Roth conversion until after these deductions, scheduled to be available from 2025-2028, expire.

How Are Roth IRAs Taxed?

A Roth IRA³ is a retirement account funded with after-tax income. Unlike a traditional IRA, there is no current income tax deduction for a contribution. In addition, a Roth IRA has no required distributions during the account owner’s lifetime, and the assets withdrawn are not subject to income tax upon receipt. A Roth offers more flexibility because there is no set schedule for withdrawing the assets. It is also possible, if the funds are not used for retirement expenses, to accumulate more assets to pass to a beneficiary.

While contributions to a Roth IRA are made with after-tax dollars, all the income and appreciation that accumulate in the account can later be distributed tax-free. In contrast, contributions to a traditional IRA are generally made with pre-tax dollars, although after-tax contributions are permitted. And while no income tax is due on the income and appreciation generated in a traditional IRA as it is earned, all assets above tax basis (the pre-tax contribution plus the accumulated appreciation and income) are subject to income tax with withdrawn.

Who Can Contribute To A Roth IRA?

There are two limitations on contributions to a Roth retirement plan: First, there are limits on the amount a taxpayer can contribute, and second, there are limitations on which taxpayers may make contributions. In 2025, a married taxpayer filing a joint return has their ability to contribute to a Roth IRA phased out between modified adjusted gross income (“MAGI”) of $236,000 and $246,000, while a single taxpayer has it phased out between $150,000 and $165,000. In 2025, the annual cap on contributions to all IRAs, including Roth IRAs, is $7,000 for taxpayers under age 50 and $8,000 for those over age 50.

Many taxpayers who could afford to contribute to a Roth earn too much to qualify. This is where the option to convert a traditional retirement plan to a Roth plan comes into play. Neither the dollar contribution limit nor the income limit applies when you do a conversion. The Roth conversion option is open to all taxpayers, regardless of income, and the only cap is the amount you have in your traditional IRA.

What Is A Roth Conversion?

A Roth conversion involves moving the assets from a traditional IRA to a Roth IRA, which generates an income tax on the full pre-tax amount. Once the assets are in the Roth, withdrawals more than five years after the conversion are free of income tax. Optimally, the taxpayer needs to have non-IRA assets to pay the tax on conversion so the full amount of the traditional IRA balance can be contributed to the Roth. Once the assets are in the Roth, there is a five-year waiting period for the earnings of the account to be distributable tax-free. If assets are withdrawn from the Roth IRA within five years of the conversion, the portion of the withdrawal attributable to earnings in the account will be taxed.

What Are The Tax Benefits Of A Roth Conversion?

By converting the traditional IRA to the Roth, the taxpayer is subject to the more favorable tax treatment applicable to Roth IRAs:

• The income tax has been paid. Under current law, no matter how much the assets grow in value, there will be no income tax on withdrawals from the Roth IRA.
• The Roth IRA is not subject to the required minimum distributions (RMDs) applicable to traditional IRAs. A taxpayer who is not depending on the IRA to fully fund their retirement needs has flexibility to control the timing of withdrawals and allows tax-free growth while the assets remain inside the Roth IRA.
• A married couple may retain the assets in a Roth IRA until the death of the survivor. Non-spouse beneficiaries of Roth IRAs are obligated to withdraw RMDs just like beneficiaries of traditional IRAs.
• For taxpayers concerned about outliving the life expectancy used to compute the RMDs for a traditional IRA, or for those who expect to have larger expenses later in retirement, having a Roth IRA allows them to defer withdrawal of those assets until they are needed.

How Does OBBBA Impact A Decision To Convert?

The OBBBA introduced significant changes to various tax provisions, including changes to individual tax brackets, new income-restricted deductions, and modification of the rules for other deductions, that impact Roth-conversion planning going forward. Key changes include:

• The permanent extension of TCJA individual tax rates, and an increase of the SALT cap to $40,000 ($20,000 for married individuals filing separately) for 2025-2029, with a 1% annual increase for taxpayers making less than $500,000;
• The introduction of a temporary senior deduction of $6,000 per qualifying individual ($12,000 for married couples) aged 65 or older, which is phased out starting at a MAGI of $150,000, with a complete phase-out at $250,000 MAGI, applicable for 2025-2028;
• An income-based floor for the charitable contribution deduction for all taxpayers itemizing deductions beginning in 2026;
• A reduction in the tax benefit for all itemized deductions for all taxpayers in the highest tax bracket beginning in 2026;
• A new above-the-line deduction is available for charitable contributions made by taxpayers who do not itemize beginning in 2026.

With recent tax law changes under the OBBBA, timing your Roth conversion has never been more important.

Example:

Jeremy and Emily are a married couple, and both are age 55. Emily has a traditional IRA valued at $500,000. Their combined income is $450,000. They pay state and local taxes of $40,000 per year and make $50,000 in charitable donations per year. Considering this information, let’s compare the tax in 2025 with no conversion with the cost of converting Emily’s IRA in 2025 or 2026 assuming all facts stay the same.

In this case, doing the Roth conversion in 2025 or 2026 puts Emily and Jeremy over the cap for the increased SALT deduction. In addition, in 2026 and beyond, the floor (applicable to all taxpayers) reduces the charitable deduction, but Jeremy and Emily also face reduced benefits of their itemized deductions due to the haircut to those deductions imposed on those in the 37% tax bracket.⁴ Their overall tax burden from a conversion is lower with a conversion in 2025 than in 2026.

What if instead of converting the entire IRA in any of these years, Jeremy and Emily converted one-tenth of the IRA per year over 10 years? This would keep them eligible for the full SALT cap and below the 37% bracket (to avoid the itemized deduction phase out). The chart below compares the cumulative tax paid over 10 years with no conversion (IRA paid in full in year 10 and taxed), conversion of the whole IRA in 2026, and converting the IRA in 10 installments of $50,000 each year.

As you can see, the least amount of tax would be paid if the IRA is converted in 10 installments. It is important to run the projections based on each unique situation. If Jeremy and Emily had larger IRAs, more deductions or rapidly growing assets in the IRA, there could be a different outcome.

Is A Roth Conversion Right For Me?

The conversion of a traditional IRA to a Roth IRA is not appropriate in all situations. You may be better off keeping the assets in a traditional IRA, at least for the time being:

• If you plan to use qualified charitable distributions to direct your lifetime RMDs to charity and plan to leave your IRA to charity at your death, then the assets in your traditional IRA will not be subject to income tax. Converting the account to a Roth IRA in that case generates an unnecessary tax.
• If you anticipate being in a lower tax bracket in retirement (because you plan to retire to a state with a lower (or no) income tax, because your retirement income will be less than your income now, or because you anticipate lower income tax rates in the future), you may not benefit from a conversion.
• If having a higher income this year due to the conversion would disqualify you for other tax benefits you plan to use, such as the increased SALT deduction, or would increase your other costs, such as raising your Medicare premiums, discuss this with your tax preparer to understand the tax impact of various options for converting.
• If you are planning to withdraw from your Roth IRA within five years, you would pay tax on the portion of your withdrawal that is attributable to earnings in the Roth IRA and will not be able to maximize the benefit of the conversion.

If you are interested in evaluating whether a Roth IRA conversion might fit with your financial plans, please consult your financial, tax, and legal advisors.