Get ready to hear a lot more about the Roth IRA. Why? Well, back in 2017, Congress passed the Tax Cut and Jobs Act (TJCA), which kicked off eight years of the lowest tax rates in American history. But, there’s a catch. This “tax sale” ends on December 31, 2025. If Congress doesn’t step in, taxes will bounce back to their pre-2018 levels on January 1, 2026. That could mean a 1% to 5% increase in marginal tax rates.
So, what’s the smart move here? Consider shifting some of your tax-deferred retirement money from your 401(k)s and traditional IRAs into a Roth IRA. You pay taxes now, but you could save big if tax rates are higher when you retire.
But how much should you move? And at what income tax bracket should you make the switch to minimize future retirement tax liability? It’s a tricky question, and it’s worth looking at some charts comparing old and new tax rates to get an idea of what could happen in 2026.
Now, I’ll be honest. I wasn’t always a fan of the Roth IRA. I couldn’t contribute to one after I turned 25 in 2002 because of income limits, and I wasn’t thrilled about the idea of a Roth IRA conversion after my income took a hit when I left banking in 2012. But now, with kids and the TJCA expiring soon, I see the value in a Roth IRA.
To decide whether to pay taxes upfront by moving assets into a Roth IRA, we need to make a few assumptions. We’re guessing that Congress will let tax rates return to previous levels in 2026, that tax rates might go even higher due to a larger budget deficit, and that your tax rates in retirement will be higher than your tax rates while working.
But here’s the thing. Most Americans probably won’t have higher tax rates in retirement. We’re a nation of spenders, not savers. So, the urgency of moving assets from tax-deferred retirement accounts to Roth IRAs isn’t high for everyone.
And don’t be fooled by the term “tax-free” when it comes to Roth IRAs. You pay taxes before you contribute, so it’s more accurate to call it a “tax-now” retirement vehicle. Yes, your money grows tax-free, and you can make tax-free withdrawals after five years. But there’s no such thing as a free lunch, especially when the government’s involved.
The only time Roth IRA contributions are truly tax-free is when you earn below the standard deduction limit and contribute. So, if you’re a working student, working part-time, or just starting your career, a Roth IRA could be a great move.
Now, let’s talk about the average American’s retirement tax profile. The median retirement balance is around $100,000, and the median Social Security payment is around $24,000 a year. Even if you withdraw $10,000 a year from your retirement balance, your total income would be $34,000. That falls within the 12% marginal federal income tax rate, which is pretty low. So, if you’re in the 12% tax bracket, it could be a good idea to contribute as much as you can to a Roth IRA.
But don’t worry, middle-class Americans. Politicians know that raising taxes on you would be a bad move for them. So, if you’re making less than $100,000, or even $250,000, you’re probably safe from future tax hikes.
Now, let’s say you’re a high earner. If you’re in the 32% tax bracket or higher, it probably doesn’t make sense to convert any funds to a Roth IRA. You’re unlikely to pay an equal or higher tax rate in retirement.
And if you’re in the 24% tax bracket, your taxes probably won’t go up if you’re making less than $250,000. And if you’re making between $95,736 and $182,100, you’re a highly coveted group of voters. So, your taxes probably won’t go up either.
Finally, if you’re in the 10% or 12% tax bracket, contributing to a Roth IRA or doing a backdoor Roth IRA conversion could be a smart move. Especially if you’re a young worker who expects to earn more in the future, or an older worker who’s underemployed or out of work.
In the end, it’s hard to say for sure what will happen with taxes after 2026. But one thing’s for sure: politicians want to stay in power, and raising taxes on the middle class isn’t the way to do it. So, while we might see some temporary tax hikes, in the long run, it’s unlikely that taxes will go up for those making less than $250,000 a year.
As always, talk to a tax professional before making any big moves. And consider checking out some retirement planning tools and investment opportunities to help you prepare for the future.
