Roth Conversions Remain on the Table for Top Tax Bracket Filers

The idea of moving traditional retirement savings into a Roth account is often dismissed for households already paying the highest federal income tax rate. Yet tax professionals say the strategy can still serve specific goals, even when every additional dollar of income is taxed at the top marginal level. Below are the main factors investors in that position may weigh before deciding whether to trigger a Roth conversion.

The Core Question

A reader identified as Joel asked whether converting pre-tax retirement assets makes sense when he expects to remain in the highest bracket indefinitely. While some advisors view a conversion in that situation as an unnecessary immediate tax cost, certified public accountant Steven Jarvis notes circumstances in which the move can be justified. The analysis rests on timing, future tax-law uncertainty and the flexibility a Roth balance can provide.

Key Advantages Cited by Advisors

1. Capitalizing on comparatively low-income years
Even high earners can experience short windows in which taxable income drops, such as the period between leaving full-time work and the start of Social Security benefits or required minimum distributions from qualified accounts. Converting during those years can shift assets into a Roth while the effective tax rate is temporarily lower than during earlier peak-earning seasons. Younger workers may encounter a similar opportunity early in their careers, before compensation accelerates.

2. Eliminating future rate uncertainty
The existing individual income tax brackets, enacted under the Tax Cuts and Jobs Act, are scheduled to expire after 2025. Congress could allow provisions to lapse or enact new legislation that pushes rates higher. Converting now locks in today’s liability and removes concern over higher brackets later. Because lawmakers can amend tax statutes at any time, some investors prefer to pay a known rate rather than risk an unknown increase years down the line.

3. Building long-term tax flexibility
A Roth balance grows tax-free and can be withdrawn without further federal income tax once statutory requirements are met. Having both pre-tax and post-tax accounts allows retirees to tailor distributions to their bracket in any given year. That flexibility can help manage Medicare premium surcharges, net investment income tax exposure and other means-tested thresholds.

When a High-Bracket Conversion May Be Reasonable

The clearest case, according to Jarvis, involves individuals who expect to occupy the top bracket for life. For these taxpayers, immediate conversion costs mirror the levy they are likely to face on future distributions. If tax rates rise after 2025, the bill due on withdrawals could exceed the amount owed today. Electing to convert therefore secures the current rate and removes the risk of paying more later.

Additionally, investors with substantial estates may view Roth assets as a planning tool. Heirs who receive an inherited Roth IRA must generally empty the account within 10 years, but withdrawals are free of federal income tax. Pre-paying the liability can preserve more capital for beneficiaries who could otherwise face taxation on accelerated distributions of traditional IRA assets.

Points to Evaluate Before Converting

Immediate cash requirement. The tax generated by a conversion is due in the year the transaction occurs. Advisors typically recommend paying that bill from non-retirement funds to avoid shrinking the converted balance.

Imagem: Internet

Time horizon. A longer investment window increases the benefit of tax-free growth. Conversions completed close to planned withdrawals provide less opportunity to recoup the upfront tax cost.

State taxes. Residents of states that tax retirement income may incur a second layer of liability. Factoring in the state rate can change the break-even calculation.

Legislative risk. While a conversion removes uncertainty about future income tax brackets, it does not insulate investors from potential policy changes that could alter Roth rules themselves. Although no such proposal is currently pending in Congress, planners acknowledge the possibility.

Consulting a Professional

Determining whether to convert, and how much, requires detailed projections of taxable income, withdrawal needs and estate objectives. A licensed tax professional or fiduciary financial planner can model scenarios using current law and alternative future brackets. The Internal Revenue Service provides official guidance on eligibility, contribution limits and distribution requirements.

For households that will continue to occupy the highest bracket, the choice often comes down to paying today’s known rate versus risking a higher one tomorrow. Each taxpayer’s situation is unique, but the option of a Roth conversion remains viable—even at the top of the tax table—when the objectives align with the trade-offs.

Crédito da imagem: original source