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The Importance of Roth Conversions Before Taxes Sunset in 2026

July 19, 2023

Today, I want to highlight a critical opportunity for optimizing your retirement planning – the Roth conversion – and explain why acting now is especially crucial before taxes potentially rise after the 2026 tax sunset provision.

The Tax Cuts and Jobs Act of 2017 brought significant changes to the tax code, including lowered tax rates for individuals and businesses. However, these tax reductions are set to expire in 2026, and it is widely anticipated that taxes may revert to higher levels after the sunset provision.

Given this impending change, a Roth conversion becomes an even more compelling strategy for maximizing your tax benefits. Here's why it's essential to consider a Roth conversion before 2026:

1. Locking in Current Tax Rates: With current tax rates being historically low, a Roth conversion allows you to lock in these favorable rates by paying taxes now on the converted amount. By doing so, you can potentially avoid paying higher taxes on the same amount if tax rates increase after 2026.

2. Future Tax Diversification: By converting some of your Traditional IRA funds to a Roth IRA, you create a more diversified tax strategy for your retirement. Diversification can help you better navigate uncertain tax environments, giving you the flexibility to withdraw from accounts with varying tax treatment based on your future tax bracket.

3. Maximizing Tax-Free Growth: Converting to a Roth IRA accelerates the growth of your retirement savings1. All earnings and contributions within a Roth IRA grow tax-free. By completing the conversion now, you give your retirement funds more time to grow and potentially compound without incurring future tax liabilities. 

4. Securing Tax-Free Withdrawals: One of the primary benefits of a Roth IRA is tax-free withdrawals in retirement. By converting now, you ensure that a portion of your retirement savings will be accessible tax-free, regardless of future tax rate changes.

5. Adaptability to Future Tax Laws: The tax landscape is subject to change, and no one can predict with certainty what tax laws will be like after 2026. A Roth conversion allows you to adapt to potential future tax changes proactively, safeguarding your retirement from unfavorable tax adjustments.

6. Reducing Future Tax Burden: By converting some or all of your Traditional IRA funds to a Roth IRA now, you can effectively "pre-pay" taxes at your current tax rate. If you expect your tax rate to increase in the future, a Roth conversion can help you mitigate higher tax liabilities down the road.

While a Roth conversion presents compelling opportunities, it is essential to consider your individual financial circumstances and consult with a qualified financial advisor or tax professional. Their expertise can help you determine the optimal conversion amount and understand the potential tax implications for your unique situation.

We believe that taking advantage of this strategic financial opportunity can significantly benefit your long-term financial security. If you have any questions or would like to explore the potential benefits of a Roth conversion, please don't hesitate to contact us. We are here to provide personalized guidance tailored to your specific needs.

Thank you for your attention, and we look forward to helping you make informed decisions that align with your financial goals.

Best regards,

Kip A Hoover

1Converting a traditional IRA to a Roth IRA is a taxable event and could result in additional impacts to your personal tax situation, including the taxation of current social security benefit payments. Be sure to consult with a qualified tax advisor before making any decisions regarding their IRA.