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Roth Conversions Just Got More Complicated (OBBBA Update) · Retirement Answers

• 0:00
  Jacob: Roth conversions just got more confusing now that the one big beautiful bill has been made law. Hey, friends, welcome back to another episode of Retirement Answers. My name is Jacob Duke. I'm a certified financial planner and the owner of a retirement planning firm that helps people just like you plan smarter and retire better. So if you haven't been living under a rock, you are likely aware that the one big beautiful bill was signed into law on July 4, and I will quickly give you some updates that are going to apply to most of you out there.
• 0:28
  But I want to spend a lot of our time talking about Roth conversions and why they just got more difficult or confusing under this new legislation. So let's first talk about the biggest updates or change that you should know about. And by the way, as I'm going through this, just know that I have an updated important numbers data sheet that has all of these numbers consolidated into one document. If you'd like a copy of that, there's a link in the show notes where you can download that document yourself and it's completely free. Alright, here's the main things that you should know about.
• 0:57
  The tax rates and the brackets and the larger standard deductions that were instituted back in 2017 under the TCJA, those have been made permanent. And this is important because the rules under the TCJA that we've gotten used to, they were set to expire here at the end of twenty twenty five and revert back to the tax code that would include higher tax rates, tighter or smaller brackets, and then also smaller standard deduction. So this being made permanent automatically helps pretty much all everyday Americans continue enjoying those lower taxes and higher standard deductions that we have gotten used to. This also includes the senior deduction for those of you who are 65 or blind also being made permanent as well. The next thing to know is that the standard deduction for 2025 was actually increased slightly as well compared to what we started the year with.
• 1:45
  So here in 2025, we began the year believing that for a single tax filer, your standard deduction is $15,000 And for those who are married filing jointly, the standard deduction would be $30,000 Well, the one big beautiful bill actually increased this year's standard deduction. So for single filers, it's gonna be 15,750. For married filing jointly is gonna be 31,500. So there is a slight increase there, which is helpful for the standard deduction for both single and married filing jointly. Now, the big news that came from this bill that was being talked about was that Social Security is no longer taxable.
• 2:20
  And that's at least what was claimed, but that's not exactly true. In fact, nothing has changed with social security or the taxation of your benefits, but what has been created is an additional deduction for seniors who are 65 or older. So this additional deduction is $6,000 per person for anyone who's 65 or older by the end of twenty twenty five. Now, there are a few different things to know about this $6,000 extra deduction, and who qualifies. So let me kind of run through this really quickly.
• 2:49
  The first thing to know is it's only for people who are 65 or older by the end of this year. The next thing is, is that this is not permanent and it will only be available from 2025 through 2028. So for the next four years, you can use this additional deduction, and I'll talk more about how this kind of works with your standard deduction or anything else you might have going on in just a moment, but this is only for four years. After that, it's technically going to be going away unless it is renewed or re upped going into the future. And finally, not everyone who is 65 or older qualifies, that's a minimum requirement, you have to be of that age in order to even qualify for the $6,000 deduction.
• 3:26
  But even if you are, you might not qualify because there are phase out ranges to determine how much of that $6,000 deduction you will actually qualify for, and this is all dependent on your income. So here are those income ranges. For single filers who have a modified adjusted gross income that is less than $75,000 you qualify for the entire $6,000 extra deduction. And I want you to pay attention to this because this is not your taxable income, it's not your adjusted gross income, this is your modified adjusted gross income. So that means if you have something like a municipal bond or a tax free interest that has to be added into your income here to determine whether or not you can benefit from the full amount.
• 4:06
  So you gotta pay attention to what type of income modified adjusted gross, your MAGI or your adjusted gross or your taxable, whenever we're talking about these things, you got to understand which ones we're actually talking about. So this has to do with your modified adjusted gross income and that's what you need to be paying attention to. And so again, really quickly for single filers, if you make less than $75,000 then you get the entire deduction. The phase out range is from $75,000 up to $175,000 So if your income falls between that 75 and 175 mark, you will only get a portion of the $6,000 reduction. If you have income more than 175, then you will not get any of that $6,000 deduction.
• 4:47
  And I'm gonna explain here in just a minute how you can calculate how much deduction you're going to get if you do fall within the phase out range. But first, let me give you the ranges for married filing jointly. For married filing jointly folks, the phase out range starts at $150,000 modified adjusted gross, and it goes up to $2.50. So it's exactly double that of the single filers. And again, key here, the range itself is $100,000 for both single filers and married filing jointly.
• 5:13
  So if you're married filing jointly and you have less than $150,000 modified adjusted gross income, you will get the full $6,000 assuming again that you are 65 or older. If only one of you within the relationship is 65 or older, you will get the deduction for that person. You don't both have to be 65 or older to get any of this extra deduction. I know that sometimes a question that comes up is Jacob, do both of us have to be 65 or older to qualify if we're married filing jointly? The answer is no.
• 5:41
  Whoever is 65 or older gets their $6,000 per person. So if your modified adjusted gross income is above that $250,000 mark, you won't get any of this deduction if you are married filing jointly. So let's talk really quickly about the phase out range, then I want to share one more detail about this new deduction here in just a moment. So the phase out range for both married filing jointly and single is $100,000 of range. That's what I mentioned earlier, just a second ago.
• 6:07
  And since the deduction per person is $6,000 your deduction amount is going to be reduced by 6% of the amount that you are over the first income limit. So just for an example here, if you are a single filer and your modified adjusted gross income is $90,000 and the phase out range starts at 75,000, you'd be $15,000 over that 75. So, you would take 6% of 15,000, which is $900 and then subtract that from your $6,000 starting deduction amount. So if you have a modified adjusted gross income, again, of $90,000 as a single filer, your deduction would be $5,100 instead of $6,000 So hopefully that makes sense. And if you've got to listen to that back and kind of go through that again, just rewind it there just a little bit and listen to that again to help make more sense.
• 6:56
  But that's how you can determine what your true deduction would be if you are over that initial phase out number. And obviously, if you are above the top of the phase out range, then you're not going to get any deduction there. So, the last thing I want to tell you really quickly about these additional deductions, for those of you who are 65 or older, you can either itemize or use the standard deduction and still be eligible for this additional senior deduction. So with all of this considered, the standard deductions for those of you who are 65 or older are now very helpful in lowering your overall tax bill. For example, a single filer who's 65 or older could have a standard deduction of 15,750, which is the new normal standard amount here in 2025, plus they can get an additional $2,000 which is the existing senior deduction for anyone who's 65 or older or blind.
• 7:49
  Plus now you can also potentially get the $6,000 extra deduction, which would all add up to a total deduction for a single filer that's 65 or older and under the income limits of 23,750. And for married filing jointly folks who are both 65, your standard deduction could be upwards of $46,700 here in 2025. Again, this is all assuming that you were under those initial phase out thresholds. So I don't know about you, but that's a big deal for anyone who's 65 or older that's retired with those modified adjusted gross incomes below the phase out ranges. And you might be thinking, Jacob, these are all really good things.
• 8:26
  Wouldn't more deductions help with Roth conversions? And the answer is, well, maybe, but really the big thing here is that conversions have actually gotten more confusing and complicated because there are going to be more decision points to evaluate now that you had these new provisions that you could benefit from. So we're gonna get more into that in just a moment. But first, there's one other thing that I wanna talk about here in the update that could impact those of you who are really high income earners, but also live in states with high income taxes or local taxes or property taxes, and you're actually itemizing because of that. So that big change for those of you who might fall into that camp is the increase in the SALT cap deduction.
• 9:05
  And it's actually been increased from $10,000 to $40,000 So this can be very helpful for those of you who are in those high income tax states or have high property taxes. And just like the extra deduction for seniors, there are a few things to know here. Is number one, this increase only applies from 2025 until 2029. So it actually goes back down to $10,000 in 2030. Obviously, it could change and be updated prior to that or be re upped or renewed, but that's current legislation and it only goes through 2029.
• 9:37
  Another important thing to know here is that the cap of $40,000 will be increasing by 1% annually through 2029. So it's 40,000 this year in 2025, that'll go up by 1% for 2026 and then 1% again from 2027. And then there is a phase out for high income earners. So if you make more than $500,000 your deduction will be reduced by 30% of the amount of income that is above that $500,000 mark. So for example, if your modified adjusted gross income is $550,000 30% of $50,000 which is the amount above your $500,000 threshold, that's $15,000 making your deduction cap not 40,000 anymore, it's gonna be $25,000 because you have to reduce it based on your income being over that $500,000 threshold.
• 10:28
  And it's important to know that the minimum cap, like you can't be reduced down to zero, the minimum here is 10,000. So regardless of your income, you can always use a $10,000 deduction as your SALT deduction on your tax return if you are itemizing. Alright, so that's a lot of information, but how does this really apply to Roth conversion decisions? Well, it adds a decision point. That's really the thing that's going on here.
• 10:52
  It's adding another layer of things to consider. So if you're married filing jointly and you're both 65 with a modified adjusted gross income of $100,000 let's say this year, you could be eligible for that $12,000 total, 6,000 each of extra deduction. But let's say that you had planned on converting $200,000 this year from traditional IRA to Roth. Now you have to decide if you want to convert the originally planned amount that you were going to do of $200,000 this year, or if you want to reduce that conversion amount down so that you can still qualify for the $12,000 of deduction. So by foregoing the deduction and converting more, you could be passing up anywhere from 1,400 to $2,600 of taxes that you could be saving this year depending on what your tax rate would be if you did or did not do the conversion.
• 11:38
  Or if you're someone who's right before 65, let's say 63, do you need to do a lot more of conversion right now so you can qualify for these extra deductions in a couple of years when you're 65 or older and basically front load your conversions right now so that you can benefit later from those higher deductions once you're 65? That's a question you've got to evaluate for yourself or should you delay your social security even longer, right? So if you're 65 plus already, maybe you should delay your social security even longer to keep your modified adjusted gross income as low as possible to help qualify for this extra deduction for these four years, which might can help you do more in conversions at lower rates as opposed to having your social security taking up a portion of that modified adjusted gross income limit. Or maybe you should just delay conversions entirely until 2028 and do them when the extra deduction is gonna be going away. Would that give you enough time to convert how much you need to before R and D start?
• 12:32
  And what if the account continues to grow a lot more and actually grows too much before you get to 2028, and then the Roth conversions, they wouldn't really be helping or making the same impact if you were to wait another three to four years. So these are a lot of the decision points. You've got to figure out, hey, what is the best thing for me in my situation? Are Roth conversions going to greatly outweigh the benefits from the deductions I could get if I didn't do the conversions? You got to evaluate this for your lifetime and say, hey, what is the benefit of these deductions?
• 13:00
  Is it really worth limiting my income and not doing as much of a Roth conversion? Is that worth it to get this deduction and fight for that? Or is it just worth it do the conversions as originally planned? Because I know my RMDs in the future are going be so huge that I'm gonna have a big tax problem later on. Or you could be saying, hey, what if they just renew this here in 2028 and they keep it going into the future?
• 13:22
  I could be planning around something that might not be changing or it might just stay the same moving forward. So there's a lot here. And while the additional deduction definitely helps, it does add this additional layer of complexity to your decision making. And for those of you who are using that SALT cap deduction increase and are benefiting from that going up to $40,000 converting over the $500,000 mark could cause a much higher effective rate on the conversion. So for example, if you are already gonna have, let's say $500,000 of income this year and wanted to do a 100,000 conversion, you're hoping and planning on that being at the 35% marginal tax rate, your effective tax rate on that $100,000 conversion would actually be closer to 45% because even though your income only went up by $100,000 your taxable income went up by 130 because the SALT cap deduction is being reduced down to 10,000 because of how much you're over the $500,000 threshold.
• 14:19
  So again, there's so much to consider here with a lot of these changes and yes, the benefits of the One Be Beautiful bill and the tax savings that normal Americans who are under these income limits are gonna benefit from, you can't deny it. It's helpful, absolutely. But you do have to understand that converting could push you over these thresholds, reduce your extra reduction if you are 65 or older. And what does this mean for you? I would say that it actually argues in favor of maybe a couple of things.
• 14:47
  Number one, if you were planning on retiring at 65 and you needed to do Roth conversions because you have too much money saved, maybe retire at 62, 63, 64 so that you can do those Roth conversions before you get to 65, which would then allow you to do conversions at lower tax brackets, right? Because you have no income because you retired early, but then also once you do get to 65 or older, you could still benefit from the senior deductions. Number one, for just a couple of years if they do expire at the end of twenty twenty eight, but if they continue and renew those into the future, you could benefit much longer. So that's one thing is actually maybe retire just a little bit earlier to speed up when you're able to do your Roth conversions, or if you're already retired, maybe front loading or converting more now before you get to 65, if you are close to 65, maybe you're 63 or 64, maybe you got a couple years here that you could do a little bit extra of deductions so that you can benefit from the senior deductions moving forward. So these are the types of things maybe you should be thinking about.
• 15:45
  This is just what I'm evaluating with my clients, right? I had one the other day where we had to actually do a little bit of math here to say, what can we convert the rest of this year so that we're not going above that salt deduction cap of $500,000 that threshold of income so that we can get that $40,000 of benefit of the deduction, but also do conversions and not go over that. So we had to do a little bit of math there to determine that. But also as I'm evaluating Roth conversions with my other clients, I'm asking them, are you willing to go above that 150 mark married filing jointly to do conversions by knowing that you're going to give up a bit of this senior deduction that's been added in here this year. So these are things that you gotta pay attention to.
• 16:24
  Hopefully this brings a little bit of awareness to you as you plan out your tax or Roth conversion strategies under this new legislation. If it has been helpful, would encourage you to send it to a friend, maybe it'll help them as well. And also remember, if you want a copy of that important numbers data sheet for 2025, I've got the updated ones, you can go ahead and click that link below to grab your free copy. Okay, thanks so much for tuning into this week's episode. I will talk to you again very soon.
• 16:51
  Hey, it's Jacob again, and I wanted to remind you that nothing discussed in today's episode is meant to be financial, legal, or tax advice. Retirement Answers is for educational purposes only. Thanks for tuning in to this week's episode. I look forward to talking with you again next week.