Key Points
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A Roth conversion lets you transfer funds from a traditional retirement account to a Roth IRA.
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Because a Roth conversion is a taxable event, it needs to be executed carefully.
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Updated tax brackets for 2027 may give you more wiggle room to convert.
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If you’ve been saving for retirement consistently in a traditional IRA or 401(k) plan, you may have an unwanted surprise to contend with. Once required minimum distributions start, you may find that you have to take very large withdrawals from your retirement savings. And that could have a host of consequences, from large tax bills to surcharges on the premiums you pay for Medicare.
To avoid that, you may want to consider a Roth conversion. With a Roth conversion, you move funds from a traditional retirement plan into a Roth IRA. Once that conversion is complete, you get to enjoy all of the benefits that come with having a Roth IRA, such as tax-free investment gains, tax-free withdrawals, and no forced distributions.
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Because a Roth conversion is a taxable event, it’s one you have to plan for carefully. But you may find it a bit easier to convert in 2027 for one key reason.
New tax brackets may give you more leeway
When you do a Roth conversion, the sum you move into a Roth IRA is taxable. And so it’s generally best to try to convert at relatively low tax brackets.
In 2027, the income thresholds for the seven different federal tax brackets are increasing. This means you should have more opportunity to convert at a lower tax rate.
This year, for example, if you’re single, the 24% tax bracket caps out at $201,775. In 2027, it’s rising to $208,325. That means you could conceivably convert an additional $6,550 to a Roth IRA in 2027 while staying within the 24% tax bracket.
Of course, it’s your total income that’s accounted for when determining what tax bracket you fall into. If you’re still working, for example, and plan to do a Roth conversion, your salary plus the amount you convert will count toward your income (not to mention any other income you might have, such as interest or dividend payments from a taxable account).
The point, though, is that you may have a bit more leeway to move funds to a Roth IRA in 2027 while avoiding a higher tax bracket. So it’s worth doing some calculations to see what conversion amount makes sense.
Give yourself plenty of time
Often, the key to a successful Roth conversion is time. If you’re attempting to move a large sum of money out of a traditional retirement plan and into a Roth IRA, spreading that conversion out across multiple tax years is often ideal.
So if your traditional IRA or 401(k) balance keeps growing, don’t wait to at least start running through different Roth conversion scenarios. You may also want to consult a financial advisor or tax professional to maximize conversions when appropriate.
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