How much in Roth conversions can you do in 2027 with the new tax brackets?

By Beth Pinsker

The math should actually start with 'if' - not 'how much'

You can now figure out how much will be left in your tax bracket in 2027 to evaluate a Roth conversion.

Most people will look at the new tax brackets for 2027 that the IRS announced on Thursday and think about how much tax they will have to pay. Some, however, will dig into the numbers to see how much they can save with Roth conversions.

The yearly adjustments for inflation that the government makes to various tax inputs present an opportunity for those trying to minimize their lifetime tax bill and optimize their retirement strategies. This is by design, as our progressive tax system has rungs with a top and a bottom, and different inputs - like the standard deduction - that affect how much tax people pay. As the base numbers change and income shifts from year to year, people have to reassess what is the best deal for them.

The idea behind a Roth conversion is to withdraw tax-deferred money, pay the tax due and then move it into a tax-free account. If the tax due today is less than the tax that might be due later on, then it's a good deal, because the money in the Roth account can be withdrawn at any point without consequences, and can be passed to heirs without any tax liability for 10 years (and only growth from that point forward).

Those planning ahead for 2027 now have real numbers to work with, so they can get started on their calculations.

Doing the math on 'if'

It's really hard to just eyeball the numbers involved in this process. So the first question on the Roth-conversion decision tree is: Are you a spreadsheet or a software person?

Elizabeth Buffardi, a financial planner based in the Chicago area, is a spreadsheet person. When she helps clients put together their Roth-conversion plan, she gathers their most current tax-year information and tax rules, and projects those forward to compare against what rates might be in the future. She also needs to know the filing status, the current pretax account balances, the total of the other income on the return, the standard deduction for the year (or the known itemized deduction, if it's higher) and the ages of the person or married couple she's helping.

Nancy Gates, who is head of education at Boldin, an online financial-planning platform, is obviously a software person. When she helps users with this calculation, she uses the same inputs, but they get crunched by an algorithm that does the same thing. The same goes for professional-grade software that other financial advisers use.

The purpose is all the same: to figure out the person's current tax rate, and project all of that information forward to when they hit the age when they have to take required minimum distributions from pretax retirement accounts (which is 73 for current retirees, and 75 for those born 1960 and later).

Only then can you start to compare.

If the tax rate now is lower than the tax rate is projected to be when you have to start taking RMDs, dig in further to see how much you should convert to make a difference in their lifetime tax payments. The number of people who fit this bill is actually smaller than you might think; only 2% of Fidelity's IRA customers make Roth conversions each year, for instance. The last total nationwide number was just 1.6 transactions in 2023, computed by the Investment Company Institute.

"Roth, in general, has just gone viral," said Rita Assaf, vice president of retirement and college products at Fidelity, in a recent interview with MarketWatch. People call in and ask about all aspects of Roth - from yearly direct Roth IRA contributions, to Roth 401(k)s, to Roth conversions - because they hear about them everywhere and want to know if they should participate.

Doing the math on 'how much'

If you decide to move forward with a conversion, then you have to decide how much. "We convert up to the top of whatever tax bracket the client is in," said Buffardi.

What that means for 2027 is calculating your taxable income - generally, your income minus the standard deduction or your itemized deductions - and seeing where it is on the chart of the brackets for your filing status. The standard deduction for 2027 will be $16,600 for individuals and $33,200 for married couples. There's an extra $6,000 per eligible senior.

A single person making $52,025 is just at the start of the 22% bracket next year. They'd pay that rate all the way up to $109,124, so the potential amount for a Roth conversion is about $57,000. The tax due on that would be roughly $12,500. If that person made $109,123, however, there would only be $1 left in the bracket to convert, and that person would have to assess whether they wanted to pay 24% on the conversion amount.

On a conversion amount like $52,025, the questions become: Do you have $12,500 to pay the tax without it having to come from the conversion itself, and do you want to? And one big caveat is to watch out for the Medicare premium surcharges known as IRMAA if you are age 63 or older, because the increased income may push you over the limit. Also think about how charitable contributions fit into your plan, because starting at age 701/2, you can use qualified charitable distributions (QCDs) to reduce your RMDs, too.

Buffardi likes to give clients a lifetime tax-savings number to explain what's going on with the Roth-conversion amounts. She has spreadsheets that map out these transactions over decades, going to age 100 for most people. Over time, the tax-free growth in the Roth account tends to eventually overcome the tax paid "early." Buffardi said that most of her clients saved $100,000 to $200,000 on lifetime taxes by converting; some saved up to $1 million. When the savings number dips low, like to $10,000 or $15,000, clients tend to skip the conversion altogether and just pay the tax as they take withdrawals.

Financial-planning software offers similar numbers and is able to adjust quickly to different inputs. It also is updated on the back end each year when new IRS numbers are released or Congress changes tax rules. Software can also model different scenarios, like assuming a married filing status and then stress testing different outcomes if one spouse should die earlier than their expected longevity.

That "widow tax bomb" is really the best use case that advisers have for Roth conversions - because when you go from filing married to single, but have the same amount of assets in your tax-deferred accounts, you can face a lot of taxes. This same sort of theory also applies for pretax money that's going to be left to the next generation. If the original IRA owner is paying 22% tax and the potential inheritor is paying 35% tax, it can make financial sense to think forward and start converting now - as long as that's truly excess money and not needed for living expenses.

"A lot of the clients I have are very concerned about leaving 'good' assets to kids," said Buffardi. As nice as it sounds, "they are worried about their kids inheriting a ton of money and having to pay a lot of tax on it."

Got a question about retirement? Fill out our questionnaire or write to me directly at beth.pinsker@marketwatch.com (please put "Fix My Portfolio" in the subject line). You can also join the Retirement conversation in our Facebook community: Retire Better with MarketWatch.

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11-07-26 0930ET