As we enter the final months of 2025 it is a great time to look for opportunities to limit future tax impacts.  One topic continues to generate buzz among clients and financial professionals alike: converting a Traditional IRA to a Roth IRA. This question has come to me a few times from clients and potential clients recently.  In considering this decision your CPA and financial advisor should work together to plan a strategy for your specific situation, and it may take several years to implement.

The Roth IRA conversion strategy creates a future tax advantage by converting traditional IRA funds to Roth IRA funds.  It is often utilized by early retirees or individuals with less than full time work who are not required to take minimum distributions yet.  The cost of conversion may be relatively small for many taxpayers even if they don’t fall into the situations mentioned above.  Additionally, once your income is over the maximum amount to contribute to a Roth IRA ($246,000 for joint filers in 2025) you may not have access to this unique tax-free savings outside of a conversion or employer retirement plan.

Understanding the Basics

Many savvy employees have consistently saved tax-deferred funds in their retirement accounts.   You may have a significant amount of savings in a Traditional IRA or 401(k) with pre-tax dollars.  Growing your retirement investment in these accounts will defer taxes on this money into the future.  While you can make distributions earlier, a required minimum distribution (RMD) must be withdrawn beginning at age 73.  Distributions are taxed as ordinary income in the year you withdraw the money.  Some people fear a large RMD will raise their taxable income into higher tax brackets. In contrast, a Roth IRA is funded with after-tax dollars and offers tax-free growth and withdrawals in retirement.  Additionally, there are no required distributions from your Roth IRA.

The conversion process involves having your investment advisor do a trustee-to-trustee transfer from your Traditional IRA into a Roth IRA triggering income tax on the amount converted.  The choice requires you to look into the future and make assumptions about your income and tax rates during your retirement years.  If you think you may be in a higher income bracket in retirement, then you should consider a Roth conversion.  But there are also other advantages to consider.

Why Consider a Roth Conversion Now?

• We can’t predict the future of tax law: Multiple factors could impact your tax rate in retirement. When one spouse passes away the remaining spouse will be filing as a single taxpayer which may shift income to higher tax brackets.  If assets move to trusts the marginal tax rate can be significantly higher.
• No Required Minimum Distributions (RMDs): Roth IRAs do not require RMDs, giving you more control over your taxable income and flexibility with cash flow.
• Estate Planning Advantages: Roth IRAs can be a powerful tool for legacy planning, passing on tax-free assets to your heirs.
• Five-Year Rule: Withdrawals from a Roth IRA are subject to a five-year holding period to avoid a 10% withdrawal penalty. If you don’t already have a Roth IRA account, you will want to plan ahead so the funds qualify for tax free distributions when you need them.
• Market Timing: Your financial advisors can help time your conversion when asset values are down, allowing you to save tax dollars while executing your strategy.

2025 Tax Changes Leave the Door Open

Not only has the OBBA tax legislation signed on July 4, 2025 opened options that may create a friendly environment for your Roth IRA conversion, it also left lower tax brackets from the 2017 Tax Cuts and Jobs Act in place.  A married couple filing a joint tax return with taxable income between $96,950 and $394,600 is in the federal tax bracket of either 22% or 24%.  Assuming these brackets are in place for your retirement it seems unlikely you will be in a significantly lower tax bracket in the future. Additionally, 2025 has a few other changes which may lower your marginal tax rate over the next few years:

• The child tax credit increased in 2025.
• The standard deduction for joint filers also increased to $31,500.
• The state and local tax cap for federal Schedule A itemized deductions was raised from $10,000 to $40,000. Unless your income exceeds $500,000 where it begins to be lowered back down.  (If your income is over this threshold the Roth IRA conversion is probably not tax efficient anyway!)
• Each taxpayers over the age of 65 with joint income less than $150,000 qualify for a additional $6,000 deduction against taxable income.

Conclusion

Converting a Traditional IRA to a Roth IRA is not a one-size-fits-all decision, nor is it just a tax decision.  The current tax law provides many taxpayers with an opportunity to consider this strategy, and it may be a great proactive step toward financial flexibility in retirement.  I believe there are opportunities for many taxpayers with minimal downsides.  Each taxpayer will have a unique situation to review and should discuss this idea with their tax professional and financial advisor before deciding to move forward funding a flexible and tax efficient retirement plan.