Kathryn Ziegler | Digital Vision | Getty Images
Converting a Roth to an individual retirement account is a popular strategy for reducing pre-tax balances and promoting tax-free growth.
But converted balances increase revenue, which could have unintended consequences amid new legislation enacted by President Donald Trump’s “Big and Beautiful Bill.”
For some investors, the increased returns on some of President Trump’s new tax cuts could become “tax torpedoes” — artificially raising tax rates through phaseouts and benefit cuts, experts say.
In that case, the “tax cost” of converting to a Roth could be higher than your marginal tax rate (the tax rate applied to your last dollar of income), says Edward Justrem, a certified financial planner and chief planning officer at Heritage Financial Services in Westwood, Massachusetts.
Justrem said that because of President Trump’s “big, beautiful bill,” “the unintended consequences of Ross’ conversion are greater than they have been in the past.”
As the end of the year approaches, many investors are dealing with President Trump’s tax changes that take effect in 2025 and affect returns filed in 2026. Many tax strategies need to be completed by December 31st, leaving limited time for key moves in 2025.
Roth Conversion Risk in 2025
Some of President Trump’s new tax cuts, including a $6,000 deduction for older Americans and an expanded cap on the state and local tax deduction known as SALT, make Roth conversions more complicated in 2025, Justrem said.
Many new deductions have a phase-out, meaning that once your income reaches a certain level, the tax reduction is completely reduced or eliminated. Without this deduction, your effective tax rate, or the percentage of your gross income you pay in taxes, could rise.
They may also lose access to the 0% long-term capital gains tax rate, which allows them to sell profitable assets without paying taxes, Justrem said.
For this reason, experts say investors should perform tax forecasting before increasing their income through Roth conversions.
Of course, depending on your long-term goals, a Roth conversion that eliminates deductions may also make sense, Justrem says. In some cases, he said, the tax savings from compound interest growth in a Roth account over many years can exceed the deduction in a single year.
The issue of phasing out “all income groups”
President Trump’s changes to the tax code added more complexity, but the phase-out of other income for tax relief is already sprinkled throughout the tax code.
For example, the child tax credit, student loan interest deduction, education tax credit, etc. have income limits.
Bruce Blumberg, editor-in-chief and co-founder of myStockOptions.com, said, “All income groups are really facing a phaseout of credits and deductions.”
Without proper revenue planning, these tax breaks could “easily disappear” and create a torpedo effect, Blumberg said.
