On July 4, 2025, President Trump signed the One Big Beautiful Bill (OBBB) into law. Now that we are about half-way through our annual client tax reviews, it has become obvious that some of the changes in the OBBB have made Roth conversions unwieldy at best and impractical at worst. Here are three things couples should consider before executing a Roth conversion under the new tax laws in 2025:
Social Security Becomes Taxable at Just $32,000, Including ½ of the Social Security Income:
It is logical to believe that during years of low taxable income you should consider completing a Roth conversion. The expectation is that your income could be higher in the future. However, for retirees, Social Security can throw a wrench on those plans. At just $32,000, including one-half of your Social Security benefit, up to 50% of your benefits become taxable. Once you reach $44,000, 85% of your benefits become taxable. So, while you could be firmly in the 12% tax bracket, a good place to be for a conversion, if the additional income causes your Social Security to be more taxable, your effective rate for the conversion could double to 20% or more.
Capital Gains Become Taxable at $96,700:
The married filing jointly tax brackets are 10% ($0-$23,850), 12% ($23,850-96,950), and 22% ($96,950-$206,700). However, it is common to overlook the other income impacting your taxes: capital gains. In the 10% and 12% brackets, capital gains are not taxable at all (0.0% rate). This makes it very important to keep the marginal rates lower when capital gains are part of your income so you may be able to capture those gains with no tax liability. However, if a Roth conversion pushes your income above $96,700, your capital gains start to be taxed at ordinary income tax rates for short-term gains and 15% for long-term gains. Like the dynamic with Social Security, at this level every dollar you convert from an IRA may result in adding taxable capital gains. Although slightly less expensive, it could still result in almost double the effective rate for the Roth conversion.
The “Senior Enhanced Deduction” of $12,000 Starts The Phase-Out at $150,000:
The OBBB adds the “Enhanced Senior Deduction” tax deduction of $6,000 for individuals 65 and older for tax years 2025-2028 but it phases out when modified adjusted gross income exceeds $150,000 for a couple. At this level of income, a couple will be firmly in the 22% bracket, will have to pay taxes on 85% of their Social Security benefits, and will pay 15% on their long-term capital gains. Roth conversions at this level are harder to justify due to the effective rate but almost completely impractical when you cross $150,000. At this level, you lose 6% of every deductible dollar for every dollar of conversion. The impact is not quite double but as you approach the full phaseout at $250,000, the effective rates of the conversion go from 22% to above 25%.
Roth conversions remain a valuable planning tool, but the new OBBB thresholds create considerations that may affect your retirement income and long-term tax strategy. As part of our True Planning Cycle, we review these and other changes that could influence your financial plan and help you make informed decisions throughout the year. We also encourage you to coordinate with your tax professional to help you capture available benefits while avoiding costly surprises. If you would like to explore how these rules fit into your broader goals, please contact us for personalized guidance. We’re happy to help.
