For the past six years, savvy retirement planners have benefited from an incredible opportunity to boost their long-term savings, but that opportunity may be closing at the end of 2025.
One of the biggest drags on retirement savings is taxes. If you want to minimize taxes, it pays to plan well in advance of when you'll need your retirement savings. And one of the best ways to mitigate your tax burden in retirement is with the strategic use of Roth accounts.
For the next two years, it's still possible to take advantage of Roth accounts in a very specific way that can help your retirement savings go further when you retire. That door will close if Congress doesn't extend the current tax rules beyond 2025.
Here's what you need to know.
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The changing landscape
In 2017, Congress passed the Tax Cuts and Jobs Act. One of the big focuses of the act, as the name implies, is lowering the income tax rates and simplifying the income tax return process for many Americans.
Those rules are set to expire at the end of 2025 when the tax law will revert to the rules in use previously. Here are the tax brackets for 2024.
| Current Tax Rate | Individual Filer AGI | Joint Filer AGI |
|---|---|---|
| 10% | $11,600 or less | $23,200 or less |
| 12% | $11,601 to $47,150 | $23,201 to $94,300 |
| 22% | $47,151 to $100,525 | $94,301 to $201,050 |
| 24% | $100,526 to $191,950 | $201,051 to $383,900 |
| 32% | $100,951 to $243,725 | $383,901 to $487,450 |
| 35% | $243,726 to $609,350 | $487,451 to $731,200 |
| 37% | $609,351 or more | $731,201 or more |
Data source: IRS.
Some of the most notable changes for retirement planning come from the 12%, 22%, and 24% tax brackets. If the tax laws aren't extended, we'll see those rates move to approximately 15%, 25%, and 28%. Married couples could see income that would currently fall in the 24% tax bracket climb into the 33% tax bracket in 2026.
As such, the ability to lock in current tax rates is very appealing.
Use a Roth account to lock in tax rates
Current retirees or near-retirees can take advantage of the current tax rates through the use of a strategy called a Roth conversion.
A Roth conversion is when you take savings from a traditional retirement account and convert them into a Roth retirement account. When you do so, you'll pay taxes on the entire amount you convert based on the current tax rates. But when you go to withdraw funds, you won't owe any additional taxes.
A Roth conversion won't make sense for everyone, but for individuals or couples that are sitting in the 12% to 24% tax brackets, it could save them a whole lot of money in taxes over the long run.
It's most advantageous to use the Roth conversion when you can keep your other income low. So if you don't have any capital gains to report and haven't started collecting Social Security, now is the most opportune time to use the strategy.
What's more, Roth conversions could be even more advantageous down the road for a couple of reasons related to your taxes in retirement. First, converting funds from a traditional retirement account to a Roth will reduce your future required minimum distributions. Second, Roth retirement account withdrawals don't count toward your adjusted gross income, which could impact the taxes you pay on Social Security and capital gains.
Everyone's situation is different, and what makes sense for one person might not make sense for another. It's best to consult a professional about the potential to save on your taxes with strategic Roth conversions if you think you might be able to take advantage of the strategy. Their fee could be well worth it if it saves you thousands in taxes over the long run.
There's no telling what Congress will do in the future. What we do know is the current law is set to expire before 2026, and there's no indication of its renewal anytime soon. With two years to prepare, it's worth exploring the potential benefits Roth conversions could have on your retirement finances.
