Depending on your situation, this may finally be the year you opt for a Roth IRA conversion.
Strategy: Take current and future tax rates into account. The new One Big Beautiful Bill Act (OBBBA) removes some uncertainty by preserving existing individual federal income tax rates for 2026 and beyond. In any event, if you go ahead with a conversion, it generally makes sense to “stagger” it over several years to reduce the overall tax liability.
Here’s the whole story: Qualified distributions from a Roth IRA are federal-income-tax-free. A qualified distribution is one that occurs after you’ve had at least one Roth account open for at least five years and you’ve reached age 59½ or become disabled or died. You can also take a once-in-a-lifetime qualified distribution of up $10,000 to cover so-called first-time homebuyer expenses. In contrast, the taxable portion of distributions from a traditional IRA is taxed at ordinary income rates. In addition, you don’t have to take required minimum distributions (RMDs) from a Roth IRA during your lifetime. With a traditional IRA, you must begin taking RMDs after age 73 (scheduled to increase to age 75 in 2033). The trade-off for these Roth IRA advantages is that you must pay current tax at ordinary income rates on the taxable portion of the traditional IRA balance you convert to Roth IRA status. For instance, say your traditional IRA is worth $1 million and you’ve made no nondeductible contributions to the account. If you convert the entire balance, you’ll owe federal income tax of $370,000 if you’re in the top 37% tax bracket. Even worse, when you figure in the “net investment income tax” (NIIT), you’re adding fuel to the fire. The 3.8% tax applies to the lesser of your net investment income or the amount by which your modified adjusted gross income (MAGI) exceeds $250,000 for joint filers or $200,000 for single filers. (These amounts are not indexed for inflation.) For this purpose, “net investment income” includes interest, dividends, capital gains, royalties, rents and income from passive activities but not distributions from qualified retirement plans or IRAs. While the taxable income triggered by a Roth conversion does not count as net investment income, it increases your MAGI, which can cause greater exposure to the NIIT. Naturally, there are several financial and personal factors to consider before you convert . This move isn’t for everyone, but the OBBBA removes concerns that federal income tax rates will be increasing anytime soon.
Best approach: Figure out the amount you should convert in stages over several years. For instance, if you convert funds that are taxed at only the 32% or 35% rate in the next few years instead of the 37% rate this year, you will reduce the overall tax hit—and defer some of it—by converting over time.
Tip: Alternatively, you might convert more funds in 2025 if the conversion amount would be taxed at a lower rate than what you expect for future years.