Think: Roth IRA

Amanda Lott, Head of Wealth Planning Strategy

Marc Seaverson, Wealth Strategist

Adam Ludman, Head of Tax Advisory

With the top ordinary income tax bracket slated to increase in 2026, many clients are asking: Is now the time for me to convert my “traditional” IRA to a Roth IRA? 

Our answer is: Now is definitely the time to analyze your choices with your tax advisor.

One key element in deciding whether to convert a traditional to a Roth IRA is your view on whether the taxes imposed later on a distribution from a traditional IRA would be higher than the taxes imposed now on a conversion.

While no one can confidently predict what tax rates would be in the future, or what tax bracket you will be in when receiving distributions, we do know that, under current law, the top U.S. bracket on ordinary income is slated to go from 37% to 39.6% in 2026. Congress had considered new restrictions on Roth IRA conversions, but after almost two years of debate over potential tax law changes, the Inflation Reduction Act signed into law on August 16th, 2022, did not include these provisions. The SECURE Act 2.0 provisions signed into law on December 29th, 2022, did not include any of these proposals – leaving the opportunity to convert to a Roth still viable.

So if, like many of our clients, you are today subject to the top U.S. tax bracket and have assets in a traditional IRA, you should explore whether it makes sense for you to convert to a Roth and pay the associated taxes on their values at current, potentially lower 2024 tax rates.¹

Proceed with care

Traditional IRAs allow assets to grow tax-deferred while Roth IRAs allow the assets to grow tax-free. While a conversion does require you to pay income taxes now at your current tax rate on the amount you move into the Roth IRA, you will not pay income taxes on that amount again: not on subsequent, compounded growth, nor when you withdraw the funds from the Roth, assuming the withdrawal occurs more than five years after the conversion and you’ve held the funds beyond the age at which early withdrawal penalties can apply.²

In contrast, although pre-tax dollars typically are put into a traditional IRA (after-tax dollars are also permitted), if the amount grows over time, all the pre-tax contributions and the IRA account investment performance you receive will be taxed at whatever your ordinary income tax rate is at the time of the distribution.

Any decision to move retirement savings into a Roth account should be made within the context of your personal circumstances and overarching wealth plans. There are numerous factors to consider, including your:

• Access to liquidity outside of the IRA to pay the taxes due on the conversion
• Life expectancy
• Time horizon until a minimum distribution from a traditional IRA would be required – age 73 for those born between 1950-59, 75 for those born after 1959
• Future income tax rates—at both the U.S. and state (and local, if applicable) levels
• Intended beneficiary(ies)—For example, if the intended beneficiary of your traditional IRA is a charitable organization that would not owe income taxes on distributions, you may not want to convert
• Heirs’ time horizon for receiving distributions–The SECURE Act of 2019 eliminated the ability for most non-spouse beneficiaries to stretch distributions from an inherited IRA beyond 10 years. Thus, inheriting a traditional IRA may increase your heirs’ income tax rates or brackets if they are taking withdrawals over a shorter timeframe, possibly making conversion to a Roth IRA more desirable
• Potential investment returns

These variables can make a big difference in your final decision.

All case studies are shown for illustrative purposes only and are hypothetical. Any name referenced is fictional, and may not be representative of other individual experiences. Information is not a guarantee of future results.

Strategies

A Roth conversion decision is not an all-or-nothing proposition. You could convert your current traditional IRA in stages over several years (albeit at a potential future higher tax rate and a higher value than today).

One way to soften the tax impact of a conversion is to take advantage of dips in the markets.

An additional strategy to consider involves how you invest the assets in a Roth IRA. For example, distributions from a Roth are not required (unlike a traditional IRA). So if you are unlikely to need the Roth-converted funds to support your lifestyle in retirement, you may want to move to your Roth a larger percentage of asset classes with potential for higher-returns (e.g., stocks) and tax inefficient characteristics such as higher turnover.

Always be mindful of the impact of state taxes, which are also due on conversions. The tax burden on individuals who live in high income tax states may be relatively higher than that of taxpayers living in low income tax states, as itemized deductions for state and local taxes are capped at $10,000 through the end of 2025. If you expect to continue to live in the same high income tax state after retirement, a Roth conversion may nevertheless remain a good long-term strategy.

Beware the “aggregation rule”

If you have a blend of pre-tax and post-tax dollars in your IRA, or multiple IRAs, you need to be aware of the “aggregation rule.” This prevents you from “skimming the cream from the coffee” by trying to convert only the non-deductible portion of your IRAs, and thus avoiding paying income taxes on the conversion.

If you convert one IRA, the IRS will look at all of your IRAs (rollovers, traditional, SEP IRAs, etc.) as though they are one single IRA to determine how much of your conversion is taxable. As a result, you could owe more taxes than you may expect when converting only a portion of an IRA that has both deductible and non-deductible money.

So, for example, the aggregation rule disincentivizes a person who has significant pre-tax dollars in several traditional IRAs from making annual non-deductible contributions to those IRAs and then converting to a Roth, as they’re going to incur significant taxes due to the required proration of deductible and non-deductible monies.

There are no ”do overs”

Roths can potentially generate more wealth for you and your family, as they free you from ever paying income taxes on the growth of assets inside, and distributions from, them. However, we strongly advise against taking any action to convert to a Roth unless you are sure. Once your traditional IRA becomes a Roth IRA, you will not be able to turn it back into a traditional IRA.

So speak with your accountant or tax advisors, and ask your J.P. Morgan team to help them model your potential paths.

¹The 37% rate, which went into effect as part of the 2017 Tax Cuts and Jobs Act (TCJA), applies in 2024 to taxable income above $609,350 for individuals and $731,200 for married couples. Many higher-income earners may find themselves moving relatively quickly into higher brackets in the coming years. That’s because the TCJA changed the method by which the government calculates inflation adjustments to the income levels for the brackets.

²While you can generally open a Roth IRA at any time, you have to wait five years to withdraw the earnings tax-free and generally you must be over age 59½. Other exceptions may apply; consult www.irs.gov or your tax advisor for your specific situation.