Presented by Axial Financial Group.
Tax laws can create new planning opportunities, but they can also raise new questions. If you’ve heard about the recently passed One Big Beautiful Bill Act (OBBBA) and are wondering what it could mean for your retirement strategy, you’re not alone.
One topic that’s receiving increased attention is the Roth conversion. While it isn’t the right move for everyone, changes to the tax landscape may make it worth revisiting with your financial advisor.
First, What Is a Roth Conversion?
A Roth conversion is the process of moving money from a traditional IRA or other eligible pre-tax retirement account into a Roth IRA.
The tradeoff is simple:
- You pay income taxes on the amount converted today.
- Future qualified withdrawals from the Roth IRA are generally tax-free.
- Roth IRAs are not subject to required minimum distributions (RMDs) during the original owner’s lifetime.
For many investors, the decision comes down to whether paying taxes now could be more beneficial than paying them later.
What Does the OBBBA Have to Do With It?
The One Big Beautiful Bill Act includes several tax-related provisions that may affect long-term financial planning.
While every individual’s situation is different, the legislation reinforces the importance of reviewing your current tax strategy rather than assuming the same approach will continue to be the most effective.
For some households, a Roth conversion may be worth considering if:
- You expect your taxable income to increase in the future.
- You believe tax rates could be higher when you begin withdrawing retirement income.
- You have several years before required minimum distributions begin.
- You want to create more tax flexibility during retirement.
- You hope to leave tax-free assets to your beneficiaries.
Rather than viewing a Roth conversion as an “investment decision,” it’s often more accurate to think of it as a tax-planning strategy.
Benefits of a Roth Conversion
Potential advantages include:
Tax-free qualified withdrawals
Once conversion requirements are met, future earnings and withdrawals may be tax-free.
No Required Minimum Distributions
Unlike traditional IRAs, Roth IRAs generally do not require distributions during the account owner’s lifetime.
Greater Tax Flexibility in Retirement
Having both taxable and tax-free retirement assets can provide more flexibility when managing your income in retirement.
Potential Estate Planning Benefits
Depending on your goals, leaving Roth assets to heirs may provide tax advantages compared to leaving only pre-tax retirement accounts.
Things to Consider Before Converting
A Roth conversion isn’t automatically the right choice simply because tax laws have changed.
Questions worth discussing include:
- How much additional taxable income would the conversion create this year?
- Would the conversion push you into a higher tax bracket?
- Do you have cash available outside of your retirement account to pay the taxes?
- How long do you expect the money to remain invested?
- How might the conversion affect Medicare premiums, taxation of Social Security benefits, or other income-based calculations?
These factors can significantly impact whether a conversion makes financial sense.
Timing Matters
Many people don’t realize that you don’t necessarily have to convert your entire account at once.
In some cases, converting smaller amounts over several years may allow you to:
- Stay within a desired tax bracket.
- Better manage the tax impact.
- Spread the tax liability over time.
- Create additional flexibility as your income changes.
A thoughtful conversion strategy often focuses on balancing today’s tax cost with tomorrow’s potential tax savings.
The Bottom Line
The passage of the One Big Beautiful Bill Act serves as a reminder that tax laws evolve, and your financial strategy should evolve with them.
A Roth conversion can be a valuable planning tool for the right person, but it works best when considered within the context of your overall retirement, tax, and estate planning goals.
If you’re wondering whether a Roth conversion could make sense for your situation, we’d be happy to help you evaluate the potential benefits and tradeoffs. Every financial picture is unique, and sometimes a conversation is the best place to start.
Axial Financial Group. All Rights reserved. 1 Van de Graaff Drive, Suite 500, Burlington, Massachusetts. 781.273.1400
This article is intended for educational purposes only and should not be considered tax or legal advice. Before making any tax-related decisions, consult with your financial advisor and tax professional.
