Roth IRA conversions have long been a go-to strategy for managing long-term tax liability. By moving funds from a traditional IRA to a Roth IRA — triggering ordinary income tax in the year of conversion — taxpayers can secure tax-free growth and tax-free withdrawals down the road.
But thanks to the newly enacted One Big Beautiful Bill Act (OBBBA), the Roth conversion calculus just got more complicated.
According to LISI Income Tax Planning Newsletter #267, authored by Keebler & Associates Partner Robert Keebler and Jim Magner, an advanced planning attorney at The Guardian Life Insurance Company of America, OBBBA’s new tax provisions introduce both opportunities and landmines.
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“While Roth conversions will continue to be a cornerstone of first-class planning, the impact of both the senior and SALT deductions — as well as the SALT phaseout —should be modeled,” Keebler and Magner wrote.
A new senior deduction — with a catch
One headline provision in the new law is a $6,000 deduction for taxpayers age 65 or older — or $12,000 per couple. But it comes with a phaseout: The deduction is reduced to zero between $150,000 and $250,000 of modified adjusted gross income (MAGI).
MAGI is your adjusted gross income (Line 11 on IRS Form 1040) plus certain deductions added back, and it’s used to determine eligibility for various tax benefits, including this new senior deduction.
Keebler and Magner warn this phaseout creates a new tax cliff for Roth conversions.
At $150,000 of MAGI, a married couple over 65 qualifies for the full $12,000 deduction — translating to a $2,640 tax savings.
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But a $100,000 Roth conversion, if it pushes MAGI to $250,000, could not only trigger a 22% income tax, but also wipe out the senior deduction.
“At first glance, it appears that a $100,000 conversion would generate additional federal income taxes of $22,000,” they wrote. “However, the actual result is an increase in federal tax of $24,640, with the difference being the loss of the Senior deduction.”
Planning tip: Tax projections should model the marginal impact of the lost deduction. In some cases, it may be smarter to convert earlier — before age 65 — to lower future MAGI and preserve eligibility for the senior deduction later.
A revised SALT deduction offers a silver lining
Roth conversions are taxed as ordinary income at the federal and state levels. Under the Tax Cuts and Jobs Act of 2017 (TCJA), state income taxes became largely non-deductible, increasing the cost of conversions for taxpayers in high-tax states.
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The OBBBA changes that by raising the SALT (state and local tax) deduction cap to $40,000, which can reduce the effective tax burden on conversions. For some, this makes conversions more attractive — as long as they stay below the SALT cap.
“A planner may consider limiting Roth conversions in such a way to avoid exceeding the $40,000 SALT limitation,” Keebler and Magner advised. Just as with the senior deduction, planners should isolate this benefit in tax models to determine whether the deduction increases the net benefit of converting.
The SALT phaseout: a stealth tax hike
The SALT deduction, however, comes with its own phaseout for high earners. Taxpayers with MAGI over $500,000 face a 30% phaseout of the SALT deduction on income exceeding that threshold. By the time MAGI hits $600,000, the deduction shrinks to the statutory floor of $10,000.
Here’s an example from Keebler and Magner: Randy and Sarah have MAGI of $500,000 and itemized deductions of $75,000, including a $40,000 SALT deduction. They execute a Roth conversion of $100,000, pushing MAGI to $600,000. As a result, their SALT deduction is slashed to $10,000.
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Translation: Their income went up by $100,000, but their taxable income rose by $130,000. At a 35% marginal rate, their effective rate on the conversion is 45.5%.
“This hidden 10.5% tax rate increase will almost certainly eliminate most, if not all, the benefits of this Roth conversion,” the authors noted. That said, they add, a larger conversion may still make sense in the long run — but only if long-term tax projections justify the tradeoff.
Bottom line
Roth conversions remain a powerful planning tool, but under the One Big Beautiful Bill Act, they demand greater precision and modeling.
Planners (and taxpayers) must now account for the interaction between new deductions, phaseouts, and income thresholds. As Keebler and Magner emphasize, what once was a straightforward tax decision now requires a more nuanced, scenario-by-scenario analysis.
