Planning Opportunities to Consider Before Year-End: Part 3 – Roth IRA Conversions

Identifying the optimal moment to evaluate your Individual Retirement Account (IRA) for Roth conversion potential requires careful analysis and strategic thinking. 2025 has brought significant tax law changes that make year-end planning more critical than ever. The One Big Beautiful Bill Act (OBBBA), signed into law in July 2025, introduced sweeping tax changes—many applying retroactively to January 1, 2025. If you filed taxes earlier this year thinking your 2025 strategy was set, the landscape has shifted. These retroactive provisions create new opportunities that weren’t available just months ago. Roth IRAs offer a triple benefit: tax-free growth, tax-free distributions, and no mandatory withdrawals during your lifetime. While market volatility can complicate timing, periods of declining values may present strategic conversion windows. Your IRA dollars have been growing tax-deferred since day one—but this tax bill is merely postponed, not eliminated. When your current tax rate is lower than what you’ll face in retirement, a Roth conversion deserves serious consideration. This opportunity is particularly valuable for those who’ve stepped away from work but haven’t yet begun Social Security or reached age 73, when Required Minimum Distributions (RMDs) begin.

Understanding the Roth Conversion Process

A Roth conversion moves money from a traditional IRA (or an employer plan like a 401(k), 403(b), or 457) into a Roth IRA. The converted amount becomes taxable income in the conversion year. However, once in your Roth IRA, those dollars enjoy permanent tax-free status—both growth and distributions escape taxation entirely, even for your heirs. The primary advantage lies in gaining control over future tax liability. By paying taxes now, you create flexibility to choose between taxable and tax-free income sources throughout retirement. Not everyone benefits equally from conversions during their lifetime. However, if you have liquidity to cover conversion taxes without disrupting retirement income, the legacy advantages are compelling. Tax-free Roth assets for beneficiaries contrast sharply with traditional IRAs, which must be fully distributed—and taxed—within ten years of inheritance under current law.

Five Strategic Drivers for Year-End Roth Conversions

Beyond the tactical advantage of converting during market downturns, five strategic factors make Roth conversions particularly compelling:

1) Avoiding Future Medicare Premium Surcharges (IRMAA)

If you’re not yet 65, strategic Roth conversions today can help you sidestep costly Medicare Pat B and Part D monthly premium surcharges later.  Any IRMAA (the Income-Related Monthly Adjustment Amount) for 2025 was triggered if your modified adjusted gross income exceeded $106,000 (individuals) or $212,000 (married filing jointly) based on your 2023 tax return.  There is a two-year lookback so your income this year will determine if IRMAA applies to you in 2027. IRMAA also operates as a cliff—exceed the threshold by one dollar, and you’re immediately pushed into the next surcharge bracket with substantially higher premiums.

2) Strategic Tax Bracket Management

Expecting an unusually low-income year in 2025? Time off, career changes, or temporary income gaps create opportunities to “fill up” lower tax brackets through strategic conversions. With OBBBA now making the current bracket structure permanent—and certain provisions taking effect retroactively for 2025—year-end tax planning has become even more valuable. The common wisdom that retirement means lower taxes doesn’t hold for everyone. Once RMDs begin at age 73, many affluent retirees find themselves in their highest brackets ever—and stay there for life.

3) Leveraging Ordinary Losses

Planning to report “ordinary” losses on your 2025 return? These losses offset Roth conversion income dollar-for-dollar, effectively creating a “free” conversion up to the loss amount. Business owners should consult tax advisors about utilizing net operating loss carryforwards. When losses offset conversion income completely, you move IRA dollars to tax-free Roth status without any out-of-pocket tax payment.

4) Building Distribution Flexibility

Maintaining both Roth and traditional IRA balances gives you powerful flexibility in managing retirement cash flow. This dual-source approach—one tax-free (Roth) and one taxable (traditional IRA)—enables sophisticated tax optimization strategies tailored to your changing circumstances each year.

5) Eliminating Future RMD Obligations

Roth IRAs remain permanently exempt from Required Minimum Distribution rules, even after age 73. Traditional IRAs offer no such freedom. By converting to Roth, you escape the IRS mandate to withdraw specific amounts annually, preserving control over income timing and tax planning. If you’re curious about your potential RMD liability, consider exploring your projections using an RMD calculator (https://www.investor.gov/financial-tools-calculators/calculators/required-minimum-distribution-calculator) to understand the magnitude of future mandatory withdrawals.

Our Perspective

Roth IRA conversions deserve a prominent place in comprehensive retirement planning discussions. However, their suitability varies based on your financial situation, tax profile, and long-term objectives. To explore whether a Roth conversion aligns with your specific goals, we encourage you to schedule a conversation with your ACM Wealth Advisor. Learn more at ACMWealth.com

Source: Required Minimum Distribution Calculator. U.S. Securities and Exchange Commission, Investor.gov. Available at: https://www.investor.gov/financial-tools-calculators/calculators/required-minimum-distribution-calculator

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