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Roth individual retirement account conversions are a popular strategy to reduce pretax balances and kickstart tax-free growth.
But the converted balance boosts your income, which could have unexpected consequences amid new laws enacted via President Donald Trump’s “big beautiful bill.”
For some investors, more earnings could trigger a “tax torpedo,” or an artificially higher rate, due to the phaseouts, or benefit reductions, for some of Trump’s new tax breaks, experts say.
If that happens, the “tax cost” of the Roth conversion could be higher than your marginal tax rate — the bracket that applies to your last dollar of income — according to certified financial planner Edward Jastrem, chief planning officer at Heritage Financial Services in Westwood, Massachusetts.
“The unintended consequences of Roth conversions are higher now than in the past” because of Trump’s “big beautiful bill,” Jastrem said.
As year-end approaches, many investors are navigating Trump’s tax changes that apply to 2025 and will impact returns filed in 2026. Many tax strategies must be completed by Dec. 31, which leaves limited time for key 2025 moves.
Roth conversion risks for 2025
Some of Trump’s new tax breaks, like the $6,000 deduction for older Americans or bigger limit for the state and local tax deduction, known as SALT, have made 2025 Roth conversions more complicated, Jastrem said.
Many new deductions have phaseouts, which reduce or eliminate the tax break entirely once income reaches a certain level. Without that deduction, you could raise your effective tax rate, or taxes paid as a percentage of total income.
You could also lose access to the 0% long-term capital gains tax rate, which allows you to sell profitable assets without paying taxes, among other issues, Jastrem said.
That’s why investors should run tax projections before adding more earnings via Roth conversions, experts say.
Of course, Roth conversions that eliminate a deduction could still make sense, depending on your long-term goals, Jastrem said. In some cases, the tax savings from years of compound Roth account growth could exceed a single-year deduction, he said.
Phaseout issues for ‘all income ranges’
While Trump’s tax law changes added more complexity, other income phaseouts for tax breaks were already sprinkled throughout the tax code.
For example, there are income limits for the child tax credit, the student loan interest deduction, education tax breaks, among others.
“All income ranges really face these phaseouts of credits and deductions,” said Bruce Brumberg, editor-in-chief and co-founder of myStockOptions.com.
Without proper income planning, these tax breaks can “easily disappear,” which can cause the torpedo effect, Brumberg said.
