MW Do Roth IRA conversions still make sense with the passage of the GOP tax law?

By Dan Moisand

The new tax law has added some wrinkles to consider

It's important to properly quantify the cost of a conversion.

Dear Dan,

If I understand correctly, Roth conversions are good when you expect tax rates to rise. With the new GOP tax law just passed, taxes aren't going up. Does this mean conversions make less sense now?

Confused About Conversions

Dear Confused,

For most taxpayers, if a Roth conversion was a good idea before the so-called One Big Beautiful Bill Act bill was passed, it is probably still a good idea.

You have the strategic value of a conversion correct. You pay tax now to avoid tax later. If the rate you would pay today is lower than the rate you would pay in the future, converting pays off. The amount of that payoff depends on the difference between the present and future tax rates. The bigger the difference, the bigger the payoff.

Read: How the passage of Trump's megabill could benefit you at tax time

For instance, if you convert $10,000 from an IRA to a Roth IRA, and that $10,000 is subject to a 12% rate, the federal tax bill is $1,200. If in the future you were expecting a 22% rate on a $10,000 withdrawal from the IRA, you would have thus expected to pay $2,200 in tax.

By having the funds in the Roth IRA, you paid $1,200 in tax the year of the conversion but avoided $2,200 in tax on the future distribution so you are better off by $1,000. That $1,000 difference corresponds exactly to the difference in tax rates. 22%-12% = 10% and 10% of $10,000 is $1,000.

Now, if the future tax rate were to be lower, say you are leaving the IRA to your church, a Roth conversion will cost you, not save you tax dollars. Using the same $10,000 example, you would pay $1,200 in tax to avoid the church paying tax, but churches are tax exempt and would pay no taxes on the bequest anyway. A conversion in that case makes no sense.

If the current and future rates are the same, 12% now and 12% later, the tax bill is $1,200 either way so there is no tax benefit to convert. There is also no tax negative to the conversion.

Before the tax bill was passed in July, tax rates were scheduled to revert to what they were for tax year 2017. Generally, this meant the 12% bracket would have been 15% and the 22% bracket would have been 25% starting in 2026. However, the new tax law removed the expiration of the 2017 bracket structure. Some taxpayers converted at 12% anticipating a 25% future tax rate. That won't happen now but they are still looking at getting the benefit of converting at 12% and avoiding tax at 22%.

Moreover, the scheduled rate increases that the new tax law avoids was just one of the reasons a taxpayer may anticipate higher future rates. For instance, surviving spouses often see higher rates due to the "widow's penalty" and over time IRA and retirement account balances can grow such that Required Minimum Distributions can increase income enough to reach higher brackets.

Also, let's not forget that even though the brackets are described as "permanent," Congress can always change the tax laws causing future rates to be higher.

While the strategy of paying now to not pay later is simple, assessing how much to convert is not, and the new tax law has added some wrinkles to consider.

For clients, we create what is essentially a mock tax return that projects out the cost of the conversion. This is the best way to properly quantify the cost of a conversion because the tax brackets are only part of the calculation. As your gross income increases, you may lose deductions, increase taxes on capital gains, incur additional taxes on investment income, or trigger an IRMAA surcharge (higher Medicare premiums) raising the cost of the conversion. It is not uncommon to see a taxpayer who appears to be on a 12% bracket, actually face a rate on a conversion of 27% or more.

If you have a question for Dan, please email him with 'MarketWatch Q&A' the subject line.

-Dan Moisand

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August 11, 2025 13:18 ET (17:18 GMT)

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