Roth conversions. They seem to be the darling of the financial service industry right now because you’re getting articles in major newspapers and major publications and they say everybody should do a Roth conversion. Well, I’m not in disagreement with that. What I am really careful and want you to be really careful about is the way you do the Roth conversions to make sure that they don’t cause any adverse tax issues for you. In other words, they don’t blow up on you. That’s what we’re going to talk about today.

just to make sure we’re on the same page. Let’s talk about what is a Roth conversion. Many of you have money in a regular 401k or a regular IRA or a SEP IRA or any of the qualified plans. The qualified plans simply mean that you’ve never paid tax on that money. You actually saved paying income tax now, when you’re earning income with the hope that in the future your income won’t be as high and maybe you won’t be in as high a tax bracket and maybe taxes won’t be as high as they are right now. So you’ve delayed paying tax, you’ve never been taxed on it.

A Roth is an account that you’ve already paid tax on it and you’ll never be taxed on it again. So to have an account where you will forever be taxed like the regular 401k or the regular IRA or to have an account where you’ll never ever be taxed on it again, I know which way I’m going. That’s the allure. That’s the appeal of a Roth conversion. So how do you get the money from the forever taxed IRA and 401k to the never taxed Roth? You have to pay the tax on it.

So, the next question is why would I want to pay the tax on it now? Well, we know that legally right now we are in an environment for the next 11 months plus of 2025. We’re in an environment where taxes are lower than they’re going to be in 2026 UNLESS Congress passes a new tax law. Now, I know we’ve elected a president who said that he wants to keep his Trump tax cuts that he put in back in 2017 in force, but one man, even if he is the president of the United States, can’t say “I want to keep those in force” as it has to go through Congress. And we all know recently how tough it is to get a new bill through Congress. So most people think that it won’t just be let’s just keep them, but it’ll be let’s keep them with some modifications. Well, that’s where we get into trouble with the modifications because you’ve got a congress that’s trying to balance a $37 trillion debt with low tax cuts and maintaining those low tax rates for the future.

So for now, the one thing we know for sure is that in 2025, the tax rates are low. So most people are saying, let’s take advantage of it this year, and everybody’s jumping on the bandwagon. A big article in the Wall Street Journal, a big article in Kiplinger Magazine. All kinds of articles are on Roth conversions and that you’ve got to do them now. And while I don’t disagree that they are a really good advantage to most people, and I really do believe absolutely this is the year to do them, I also know that there are ways to do them that will have an adverse effect on your taxes and an adverse effect therefore on your financial status. So if Roth conversions are so great, let’s talk about the potential landmines that you could run into If you’re not careful when you do a Roth conversion, and I know because we do Roth conversions with most of our clients who are willing to look at it and see the advantages of it.

When we do a Roth conversion with our clients, we have to be very careful to not to push them into a higher tax bracket. Now let me give you one illustration that’s real dramatic. At around $100,000 of earned income, adjusted gross income, as a married couple, and at around 50,000, if you’re single, you move from a 12% tax bracket to a 22% tax bracket. That’s a big jump. That’s a 10% jump. So moving up in tax brackets is something you need to be highly aware of because it may just take all the steam and all of the positive out of doing a Roth conversions. Let me show you what I’m talking about. Let’s say you’re at 100,000 as a married couple or 50,000 as a single couple in earned income, and you read those articles and you say, I want to do a Roth conversion, and you just go do a Roth conversion without good advisement. Let’s say you do 50,000, well, rather than 12% tax on that $50,000 that you’ve converted, you’re going to push yourself $50,000 into the 22% tax bracket.

So you might be thinking, well, I’m going to pay about $6,000 federal tax on this. Wrong. At 22%, you’re going to pay about $11,000 taxes. So the question you have to ask, the landmine you have to avoid, first of all, is if I do a Roth conversion, what is it going to do to my adjusted gross income? And therefore, what’s it going to do to my tax brackets? Is it going to push me into the next highest tax bracket and is that something I really don’t want to do?

The second landmine, the second landmine has to do with Medicare part B and part D. Now, let me show you how that works. There’s this tax out there called Irma. Well, here’s what happens with Medicare Part B and part D. There’s a tax out there if you make too much money. Now, granted, this is in the $196,000 range for a married couple around $200,000 and around $100,000 tax for a single person.

But if you push yourself into that Irma tax I-R-M-A-A tax is what it’s called, if you push yourself into that, then instead of paying the regular $185 a month for part B and nothing for Part D, you’re going to up your game. You’re going to have to pay almost $300 a month for part B and you’re going to have to pay about $50 a month for Part D. So is that something you want to deal with? And if you’re married, listen to this. If you’re married and you’re both on Medicare part B and part D, it’s times two. So if you push yourself another $100, another $50, that’s $300 a month more or $3,600 a year more, you’re going to have to pay because of the Medicare tax that you have to pay when you go over certain limits. Now, how do you avoid that?

Be careful for that landmine because if you get very excited about Roth conversions and you hear even what I say forever taxed in the IRA and the 401k never taxed in the Roth 401k or the ira, and you just want to do more and more and more when you file your income tax next year, you might not be a happy camper because if you’re applying for Medicare or if you have Medicare, it’s going to push your part B in part D forward. You say, well, I’m so lucky I’m 63 or 64. There’s a snafu there too. When you get to be 65, they’re going to look back two years on your earnings to determine what that part B and part D is going to cost you. So by doing it at 63 or 64, you’re going to be costing yourself potentially a Medicare boost on part B and part D when you get there.

So it’ll be waiting for you, but it’ll be too late to unravel it because you’ve already stepped on the landmine. Be careful about your Medicare part B and part D cost.

Let’s talk about a third landmine when you set out to do Roth conversions that you need to be aware of or it could really blow everything up, and that is capital gains. Now, under our current law for 2025, up until $100,000 of taxable income for a married couple or right about $50,000 for a single person, you’re able to pay zero capital gains. Now, I don’t know how you are, but zero is my favorite tax bracket. So if you are making $50,000 a year and you have something that you could sell that you want to sell, but you don’t want to sell it because it will incur a capital gain. If you’re at $50,000 worth of income as a married couple or maybe $25,000 of income as a single person and say you want to sell $25,000 worth of capital gains, you’ll pay no tax.

You’ll pay no tax as a single person that’ll bump you up to around 50. You’ll pay no tax as a married couple, it’d bump you up to $75,000 and your capital gains tax on that capital gains portion is zero. But remember that in the conversion from an IRA to a 401k or a 401k to a Roth IRA, you have to pay the tax and all of that money comes out. What are you getting taxed on? You’re getting taxed on every penny that comes out of that 401k or IRA as regular income. So let’s say you’re at 50,000 as a married couple and you want to convert 50,000, that puts you at a hundred thousand. And then on top of that you have $30,000 worth of capital gains. Well, you’re over the limit. So you’re going to pay 15% capital gains because it ties into the creeping tax bracket, but it’s the capital gains tax bracket that has crept up on you and blown up some of your Roth savings by converting over into the Roth.

So again, you can’t just do this in isolation. You’ve got to know what you’re talking about. The major landmines that I see are the bracket creep where you creep up higher in your bracket. That is the Medicare tax where you have to pay more for Medicare part B and part D, and the capital gains where you push yourself, where otherwise you would pay nothing for a little capital gain, but yet you have to pay for capital gain because you’ve pushed yourself over the married couple or the single person limits into where you have to pay 15% capital gains.

Let me give you two specific instances where I’ve seen people recently make mistakes. They got ready to do a Roth conversion and they converted right up to that limit of going into the 22% tax bracket. Did it at the end of the year, you’ve got to do it by December 31st. They did it at the end of the year, called us in March and said, Hey, we’ve just come over as a new client. Last year we were working with somebody and they just told us to do Roth conversions on our own and we forgot we had taken out $40,000 earlier in the year from an IRA and it pushed us into a higher tax bracket by $40,000. So see, when you get ready to do the Roth conversions, you’ve got to consider everything. How is it taxed? Is it regular income? Is it capital gains income? How does it add? What is the total When I add those, do I have to add that or not? All of those things come into effect when you start playing with this on your own, okay? And you start doing it on your own. You’ve got to be really careful and ask all the questions to make sure you haven’t put yourself out of bounds and you haven’t stepped on a landmine.

The second illustration I can tell you came from training with Ed Slott. Ed Slott is known as America’s Authority on IRAs and 401Ks and the last event, I go to two events two days long every year and just study changes in tax law and changes in IRS resolutions and rulings, and Ed brought us a letter and he said, not naming anybody, but he said a gentleman from Pennsylvania had decided to do Roth conversions on his own. And he’s working with one of the big no charge investment companies with the V. That starts with the V. You probably know who I’m talking about, but it’s do it yourself and you never have to pay an advisor and do anything. So he was doing his Roth conversions, got it all laid out. This guy’s an engineer, so he, he’s not somebody who shouldn’t understand the technical aspect of this.

Got it all ready. Looked at it again, hit the submit button. It converted all 2.1 million of his IRA in one year. That meant that most of his in income was going to be taxed. Most of the money that was in that IRA was going to be taxed at over 50% in the state of Pennsylvania. It’s amazing what that cost him. And the reason he was now working with Ed Slott is they were trying to write and get private letter rulings and appealed to the IRS and so far they were getting turned down and they said, once you do a Roth conversion, it’s done. If you do it incorrectly, you’re wrong. And this guy had made a $2.1 million error, whatever you want to call it, and it had cost him so much of his IRA. Don’t get caught like that. Make sure when it comes to a Roth conversion, you do it correctly.

There’s no going back, there’s no undoing it, and you got to live with whatever you do, we offer you and others can offer you if they’re willing to, professional experience and guided input as to how to do your Roth conversions, we’ll sit down with you, or others – make sure somebody sits down with you and doesn’t just tell you what to do. Make sure that they give you your options and make sure you ask the question, what’s this going to do to my marginal tax bracket? Make sure you ask the question, what’s this going to do to my Medicare part B in part D? Make sure you ask the question, what is it going to do to any kind of capital gains tax that I might have to pay? And a whole other host of more minor questions and options that you have that you might step on a landmine if you do them incorrectly. If you need our help, just get in touch with us. I promise you every week, if you’ll give me a few minutes, I’ll do my best to increase your financial knowledge and if we can help you particularly about a situation, a question, anything you’ve got, go to the website, get an appointment, give us a call.