Act Now: Roth Conversions in 2025 Can Spread Tax Burden and Save Long-Term
Taxpayers are advised to consider Roth conversions this year, given the current stock market conditions and tax rate extensions. This strategy can help spread tax payments and potentially reduce long-term tax burdens.
Roth conversions can be beneficial when done earlier in the year. This allows the tax burden to be spread over two quarterly payments in September and January, instead of one lump sum in January. However, it's important not to be too aggressive with these conversions, as stock market volatility is expected to remain stable for the next few years due to the extension of current rates by the One Big Beautiful Bill.
To navigate this, it's recommended to consult with a tax attorney or a forward-thinking CPA. Most financial advisors do not provide stock market advice, making these professionals crucial for reducing long-term tax burdens. A common strategy is to fill your current tax bracket with Roth conversions, as it can still save money in the long term despite paying slightly more this year. This is due to the tax-free growth that follows.
Given the current stock market volatility, converting Roth conversions now can help 'sell high'. This avoids pulling money out in a down stock market, which could result in a lower taxable amount for conversion. Additionally, if you've lost money in your IRA this year, converting those funds to a Roth while they're down can lower the taxable amount for conversion.
Many investors typically consider Roth conversions towards the end of the year. However, it's important to note that conversions cannot be 'recharacterized' or 'undone' if too much is converted, potentially pushing investors into a higher tax bracket.
In conclusion, Roth conversions this year can be a strategic move, especially with the current stock market conditions and extended tax rates. Spreading tax payments and potentially reducing long-term tax burdens are key advantages. However, it's crucial to consult with a tax professional and consider the specific circumstances of your financial situation.
