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Before the elections, some advisors have increased Roth Individual Retirement Account conversions for customers facing the threat of higher taxes after 2025.
NOW, tax hikes less likely under the elected president Donald Trump. However, demand for Roth conversions will continue as investors seek long-term tax planning strategies, experts said.
“In general, we see an uptick in Roth conversions at the end of the year and beginning of the new year ahead of the April tax filing deadline, and we expect to see these trends again in 2025,” said Rita Assaf, vice president of retirement offerings at Fidelity Investments.
Fidelity saw a 45% year-over-year increase in Roth conversion volume in July, Assaf said.
But while Roth conversions are on the rise, many investors are still learning more about the strategy.
“I think you’re only going to see an increase in Roth IRA conversions,” said certified financial planner Byrke Sestok, a partner at Moneco Advisors in Harrison, New York.
“The percentage of people who know about the benefits of Roth IRA conversions is still small,” he said. “The number of people who actually execute a conversion is even lower.”
The Advantage of Roth Conversions
Roth conversions change before taxes or nondeductible IRA funds to a Roth IRA, which can jump-start growth tax-free. Compromise pays off regular income taxes on the converted balance.
With Trump 2017 tax cuts set to expire after 2025, including lower federal tax brackets, some advisors have accelerated Roth conversions for their clients to take advantage of lower tax rates through 2025.
However, Trump has committed to extending his 2017 tax cuts, which would keep lower tax brackets intact. This plan could be simpler if Republicans controlled the White House, Senate and House of Representatives.
Even without tax increases from Congress, experts say, Roth conversions can lower long-term taxes on your portfolio, especially for older workers and retirees. significant pre-tax balances.
However, the suitability of Roth conversions depends on your “unique financial situation,” Assaf said.
Filling out the tax brackets
Advisors often perform Roth to low-income yearssuch as early retirement before claiming Social Security benefits or receiving required minimum distributions. The strategy can minimize the initial tax bill while reducing your pre-tax balance.
Currently, you can consider “filling the 12% and 24% tax brackets” with income triggered by a Roth conversion, because there’s a big jump to the next level, Sestok said.
However, it is important to perform a comprehensive tax projection, including all other sources of income, before implementing the strategy, tax professionals say.
Each bracket is based on “taxable income,” which you calculate by subtracting the greater of the standard or itemized deductions from your adjusted gross income. THE taxable income thresholds will increase in 2025.
