New Tax and Policy Law can Have Impact on Roth Conversions

New Tax and Policy Law can Have Impact on Roth Conversions- Hazards and opportunities are both presented by the new tax law known as the “One Big Beautiful Bill,” especially when it comes to Roth conversions. A recent article, “Beware New Roth-Conversion Pitfalls, Keebler Warns,” from Financial Advisor alerts readers of what they need to know. While many principles remain the same, there are changes, and mistakes could be costly.

When you convert a traditional IRA to a Roth, taxable income is created. The advantage lies in the future when Roth distributions are tax-free. Roth IRAs also don’t require minimum distributions (RMDs) when the account owner turns 73, unlike traditional IRAs. These distributions can push people into higher tax brackets and create higher Medicare surcharges.

Are you better off paying the extra income tax for a Roth conversion now, when tax brackets are low, or paying them later when taxes might be higher? It’s a case-by-case question.

Standard deductions have increased only slightly, from $15,000 to $15,754 for single filers and from $30,000 to $31,500 for married filing joint taxpayers. These deductions will have annual inflation adjustments in the future. If this reduces taxable income, a Roth conversion could make sense.

Another aspect of the new law is a deduction for seniors starting this year and going through 2028. If you are at least 65 years old, you can add another $6,000 for singles and $12,000 for married couples filing jointly, as long as both spouses are 65 or older. However, there’s a twist: the senior deduction is reduced by 6% for every dollar the Modified Adjusted Gross Income exceeds $75,000 for singles or $150,000 for joint filers. Once the senior’s income reaches $175,000 (single) or $250,000 (couple), they lose the deduction. Keep this in mind when considering a Roth conversion.

For self-employed and small business owners, the qualified business income deduction is now permanent. Non-corporate taxpayers may deduct up to 20% of the income from a pass-through business, such as a partnership or sole proprietorship. However, there are limitations to keep in mind.

A single filer with income up to $75,000 or a joint filer with up to $150,000 in income may take the complete 20% qualified business income deduction. The phase in levels will be indexed for inflation after 2026. However, if the taxable income exceeds $544,600, the deduction is lost.

Finally, another deduction impacted by modified adjusted gross income is the exemption for state and local taxes (SALT). Starting in 2025, if you itemize instead of taking the standard deduction, you can deduct as much as $40,000 from federal income tax for local taxes, with the amount increasing by 1% every year through 2029. However, the SALT deduction maximum limit is reduced by 30% for every dollar of taxable income between $500,000 and $600,000. If you earn more than $600,000, the SALT deduction drops to $10,000.

With the new tax law firmly in place, now is the time to review how your tax planning intersects with your estate plan. Speak with your estate planning attorney to be sure that you are not missing any opportunities for this and the coming year.

Schedule your phone consultation: THE LAW OFFICES OF CLAUDE S. SMITH, III

New Tax and Policy Law can Have Impact on Roth Conversions

Reference: Financial Advisor (Oct. 8, 2025) “Beware New Roth-Conversion Pitfalls, Keebler Warns”