Successful tax planners understand the value of Roth savings. A short-sighted or simplistic approach to Roth conversions could lead to having less after-tax net worth over the long-term.

In our first article in this series, we showed how paying the tax on your Roth conversion is actually one of the benefits, sheltering more assets in qualified retirement accounts.

In the second article, we demonstrated how reducing your required minimum distributions (RMDs) and retaining more IRA assets is another benefit of Roth conversions.

In the third article, we explained how Roth conversions can decrease your taxable income and increase your tax savings over the long haul.

In this article, we are looking at how a Roth conversion today can decrease the outstanding political risk on your assets in the future.

The tax code changes on the whims of Congress.

Social Security benefits were explicitly excluded from federal taxable income, until they weren’t. All state and local taxes and mortgage interest were available as itemized deductions, until a cap and a limitation were instated. Passive real estate losses were allowed without limitation, until a limitation was imposed. Across our history, qualified income has been taxed many different ways with new taxes added during recent history. The brackets have changed from as low as 3% in the 1800s to as high as 91% in 1960 and everywhere in between.

When you look at history, you can see that nothing is more permanent than a temporary tax nor is anything more temporary than permanent tax relief.

Right now in 2024, we have the unique circumstance of knowing when the next tax cliff may come. Many important features of our current tax code are scheduled to expire in 2026.

Rules as written, the ordinary income tax brackets will compress for married filers while the tax rate also increases for all. This means that lower income will face higher tax brackets while nearly all the tax rates also increase. The 12% becomes the 15%, 22% becomes the 25%, and the 24% becomes the 28%.

This means that any taxable income currently facing the 22% or 24% top marginal rate has the potential to be taxed at the 25% to 28% top marginal rate in the future. In this way, a Roth conversion to the top of the 24% bracket could save you money, even if all of your other circumstances stay the same, because it protects those assets from the higher rates on the books for 2026.

However, those are just the rules as written now. As we said before, the tax code changes on the whims of Congress.

Currently, Congress appears divided. Some of the Republicans are running on the promise to try to make the tax cuts permanent, while many of the Democrats like the expiration and are also trying to pass legislation to increase taxes in other ways.

Regardless of how the tax rates in 2026 turn out, you still have the political risk from what Congress may do to the tax code across the rest of your life. Do you think that the effective tax rates will go up or down from here? From a long-term perspective, like our research in the article “How Our Current Tax Brackets Compare to Historical Ones,” our current tax rates seem like a good deal regardless of what happens in 2026.

The decision between Roth or traditional IRA is only neutral if you ignore all factors other than one constant top marginal income tax rate. As we have demonstrated many times, when you take into consideration all the various tax rates, the Roth is usually cheaper for investors over the long run. This is made even more true if you consider the ordinary income tax brackets themselves increasing in the future.

In addition to all the other ways that doing a Roth conversion helps, it also helps protect you from the political risk of Congress doing something to your taxes in the future. Converting early can avoid your exposure to tax changes going forward as a Roth IRA is never taxed again.

Photo by Sebastian Coman Photography on Unsplash. Image has been cropped.