Roth Conversion Rules Changed: What Retirees Need to Know Now!

 New tax law changes from the “One Big Beautiful Bill” are reshaping how—and when—retirees should consider Roth conversions. In this episode, George Jameson breaks down the hidden tax traps, deduction phase-outs, and why timing your conversions just got more complicated. 

 Welcome to "The Retirement Guide" Podcast! I'm your host George Jameson, owner of Capital Wealth Group, a Fee Only Advisory firm. Whether you’re nearing retirement or already retired, Join me each week as we explore the world of retirement planning and equip you with the knowledge and tools you need for a successful retirement.

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This is for education only.It is not tax, legal, or investment advice. Before  acting on any information consult your tax, legal, or investment advisor.

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Transcript

George Jameson: 0:18

Hi, and welcome back to Your Retirement Guide podcast. I'm George Jameson, certified financial planner and founder of Capital Wealth Group here in Columbia, South Carolina. Today we're diving into some breaking tax legislation that could have some serious impact on your retirement strategy, especially if you're considering doing any Roth conversions in the near future. Congress just passed what they call the one big beautiful bill, as you know. And while parts of it might sound helpful, some of the fine print is making Roth conversions a lot more complex, particularly for retirees and those nearing retirement. So if Roth conversions have been a part of your tax strategy, or if you're just now thinking about converting your traditional IRA funds to a Roth IRA. You want to pay close attention, so let's jump in. So Roth conversions are all about timing the idea is to move money from a pre-tax account to a Roth iRA, pay taxes on it now, ideally at a lower rate, and then let it grow tax free for the rest of your life. But that tax rate you pay on the conversion and what your potential future tax rates will be is everything. And under this new bill, the math just got a little more messy. So the tax bracket expansion sounds great, but there is a catch, one headline from the bill is that the lower tax brackets, the 10 and 12% brackets are being widened. Which is good news. In fact, for married couples, the 12% bracket could stretch all the way up to around a hundred thousand in 2026. Depending on inflation adjustments, that creates more room to do conversions at a lower marginal rate. So the bill also introduces something called the enhanced Senior deduction. A$6,000 per person additional deduction if you're over the age 65. So for married couples both over 65, your standard deduction could jump to around$46,700. This is very generous. Of course, however, it does end after 2028. And the deduction phases out once your income reaches certain thresholds. And guess what might push you over those thresholds? Yep. Roth conversions. So let's say you're comfortably under the limit. But then you do a$40,000 Roth conversion that can phase out part or all of your enhanced deduction, which means you're suddenly paying tax, not just on the conversion, but on a higher taxable income base as well. That changes your effective tax rate often by two to 4% or more depending on where you land. However, keep in mind, I'm not saying you shouldn't do a conversion after age 65. It is just something else you should take into consideration if you're planning to do a conversion in 20 25, 26, 27, or 28. And the enhanced senior deduction isn't the only area where you could get burned. The new bill is loaded with phase outs and hidden cliffs that can affect your capital gains, brackets, charitable deductions, the alternative minimum tax, a MT, and even more important Medicare premiums through the IRMAA surcharges. And then you add in Roth conversions where you are voluntarily creating taxable income. And suddenly you could be tipping over several of these lines without realizing it. In fact, depending on where your income lands, a conversion you think is costing you 22% might actually hit you at an effective rate of 24.6 or more once everything's faced out. Let's look at a quick example. Let's say you're a married couple, both over 65. You have 40,000 social security, 20,000 other income, and you're thinking about converting another$50,000 to a Roth IRA. On the surface, it looks good. But once you factor in the senior deduction, phase out, the impact on your capital gains rates and higher Medicare premiums, two years down the road, suddenly that$50,000 conversion has some hidden costs. Now, this doesn't mean that doing raw conversions are off the table at all, but it does mean you need to take all of this into consideration. So what should you do first? Don't wing it. Of course, you can't just plug in numbers in a calculator anymore, and guess what your taxes will be. The new rules are complex and interconnected. Second, consider using tax planning software that actually models effective marginal rates and IRMAA surcharges to find out the best amount to convert each year. That's what we do here at Capital Wealth Group, because this stuff is hard to calculate manually. We use professional financial planning software called Right Capital and Holistiplan to make sure Roth conversions make the most sense, and if they do, how much should you convert and for how long? Does it make sense to convert up to the 12% bracket, the 22% bracket, or the 24% tax bracket? Or does it make sense to avoid IRMAA surcharges altogether when converting, or even up to the first or second tier of the Irma surcharge and so on? And what is the exact amount you can convert to stay under these surcharges? We then double check our figures with our in-house CPA to make sure our calculations are correct. And then third, you need to talk to someone no matter what. If you're working with a tax pro or a financial planner, great, just make sure they're up to speed on the new rules and are experts in retirement planning and Roth conversions. If not, well, that's what I'm here for. Gimme a call. Schedule a free complimentary meeting. And now to my final thoughts. The one big, beautiful bill has made Roth conversions more complicated, but also more important to plan correctly. If you're over the age 50 or getting close to retirement, and you've been wondering whether now's the time to do Roth conversions, I'd love to help you run the numbers. We'll figure out how to minimize taxes not just today, but over your entire retirement. Thanks for joining me today. If you found this helpful, feel free to share it with a friend or a loved one who's also thinking about their retirement tax strategy. As always, you can find more at Capitalwealthgroupsc.com. Until next time, I'm George Jameson. Stay smart. Stay diligent. Stay intentional, and keep planning for the retirement you deserve. Thank you for listening and have a great day.