Note: This is an updated version of an article I first wrote in 2018, incorporating current tax laws (including the OBBBA), updated contribution limits, current context, and insights from other tax articles I’ve written since then.
One way we practice wise retirement stewardship is by making good use of the tax-advantaged savings plans available to us. Tax deferral is a gift of God’s common grace that we can all take advantage of here in the U.S. (Psalm 145:9).
As our savings earn interest and dividends and increase in value, we get to keep the taxes—at least temporarily, and sometimes indefinitely—which helps them keep growing. Then, depending on the type of account, we only have to pay taxes on the money we withdraw (or none at all in the case of a Roth account, though your heirs may eventually face taxes).
A great way to take advantage of tax deferral is to save in your company’s defined contribution retirement plan, such as a 401(k) or 403(b). You probably did that before contributing to an Individual Retirement Account (IRA)—or “arrangement” as they are technically referred to by the IRS. That especially makes sense when you receive an employer matching contribution (rule #1: if you’re offered “free money,” take it!).
Once you’ve maximized your employer match, if you want to save more, you may consider contributing to an IRA. In an earlier article, I presented a suggested approach for allocating your retirement savings between your employer plan and your IRA based on a 15% savings level.
The focus of this article is the tax implications of IRAs—Roth IRAs and Roth Conversions, in particular—in light of current tax laws as of 2025. As with all previous articles, you should not consider this as professional financial or tax advice, and you should consult with a licensed professional before making any decisions or changes to your accounts that may have tax implications. (Read our Terms of Use HERE.)
Types of IRAs
IRAs are simply a way to save for retirement outside your company-sponsored plan, and they offer certain tax advantages. Those benefits depend on your situation and the type of IRA you have.
IRAs come in different flavors. There are Traditional IRAs, Roth IRAs, SIMPLE IRAs (a misnomer if ever there was one), and SEP IRAs. They differ mainly in how they are established and their respective tax treatments.
Individuals set up traditional and Roth IRAs, whereas self-employed individuals and small business owners establish SEP and SIMPLE IRAs. From a tax standpoint, in most cases, Traditional IRA contributions are “before tax” and therefore tax-deductible, whereas Roth IRA contributions are “after tax” and consequently non-tax-deductible.
There are some caveats to the deductibility of Traditional IRA contributions based on whether you have a retirement plan through your work, and also your income level. Income tax filing status (single or married/joint) also plays a part. You can get more information on all of that from the IRS here.
Both Traditional and Roth IRAs grow tax-free, but one of their considerable differences (and arguably, the most significant) is how you are taxed when you withdraw from them in retirement. After age 59½, withdrawals from Traditional IRAs are taxed as regular income, but funds can be withdrawn from Roth IRAs tax-free.
2025 contribution limits and income thresholds
For 2025, the contribution limits have increased quite a bit since 2018 due to inflation adjustments:
- IRA contribution limit: $7,000 (under age 50) and $8,000 (age 50 and over–”catch up” contribution)
- 401(k) contribution limit: $23,500 (under age 50) and $31,000 (age 50 and over–”catch up” contribution)
Roth IRA income phase-out ranges for 2025:
- Single filers: $150,000–$165,000 (MAGI)
- Married filing jointly: $236,000–$246,000 (MAGI)
If your income exceeds these thresholds, you cannot contribute directly to a Roth IRA, though backdoor Roth conversions remain an option (more on this later).
IRAs and the current tax environment
The tax landscape has changed significantly since 2018. The Tax Cuts and Jobs Act (TCJA) of 2017 has been made permanent through the One Big Beautiful Bill Act (OBBBA), passed in 2025, which also introduced additional provisions favorable to retirees.
Key provisions affecting IRA decisions:
- Permanent tax brackets: The current brackets (10%, 12%, 22%, 24%, 32%, 35%, 37%) are now permanent, providing more certainty for long-term planning.
- Senior deduction: A new temporary deduction (2025–2028) of $6,000 per person age 65+ significantly reduces taxable income for retirees, though it phases out at higher incomes ($150,000 MAGI for married couples).
- Higher standard deduction: For 2025, the standard deduction for married couples filing jointly is $31,500, plus an additional $1,600 per spouse age 65 or older, totaling $34,700 before the senior bonus.
These changes have pretty significant implications for the Traditional vs. Roth decision and for Roth conversion strategies.
Traditional vs. Roth: the tax arbitrage reality
As I’ve written about extensively in recent articles (see here and here), the reality for most middle-income retirees is that effective tax rates in retirement are significantly lower than marginal rates during working years.
Here’s what I’ve discovered through my own experience and analysis:
- While working at peak earning years, many of us were in the 24%, 28%, or even 32%+ marginal tax brackets (remember, tax brackets can change)
- In retirement, even with RMDs and Social Security, effective federal tax rates often fall to 2–6% for middle-income retirees
- The combination of standard deductions, senior deductions, QCDs, and the progressive tax structure creates powerful “tax arbitrage.”
That means, for many people, contributing to Traditional accounts during high-earning years (saving 24–32% in taxes) and withdrawing in retirement (paying 10–12% marginal, often much lower effective rates) produces better lifetime tax outcomes than Roth contributions.
When a Roth IRA makes more sense
Despite the tax arbitrage advantage of Traditional accounts for many retirees, Roth accounts still make excellent sense in these situations:
- Younger workers in lower brackets: If you’re in the 10% or 12% bracket now, paying taxes upfront makes tremendous sense, especially with decades of tax-free growth ahead.
- Expected higher future income: If you anticipate significantly higher earnings in retirement (perhaps from pensions, rental income, or other sources beyond Social Security and RMDs).
- Tax diversification: Having some Roth assets provides flexibility and hedges against tax law changes.
- Estate planning: Roth IRAs are excellent vehicles for leaving tax-free wealth to heirs (though note the 10-year distribution rule for most beneficiaries).
- Early retirement plans: Roth IRAs allow penalty-free access to contributions (not earnings) before age 59½, which can be helpful for early retirees.
- First-time homebuyers: Roth IRA rules allow penalty-free withdrawal of up to $10,000 for a first home purchase.
To convert or not to convert?
I have most of my assets in a Traditional IRA because there were no Roth 401(k)s or Roth IRAs during the first half of my working life (the Roth IRA was introduced in 1997), and they had more stringent income restrictions than they do now. Although my savings continue to grow tax-free, I have to pay regular income taxes on any withdrawals I make in retirement.
Because I am subject to income taxes when I withdraw from my Traditional IRA, I have occasionally considered doing a “Roth Conversion.” Conversion is something the IRS allows, allowing you to change a Traditional IRA to a Roth IRA if you meet certain conditions, not the least of which is paying all the taxes due on the converted amount in the year the conversion is done. Also, once you convert, you have to wait five years before you can start withdrawing earnings from it tax-free.
Before 2010, only people who earned less than $100,000/year could do a Roth Conversion, but that has changed, and now everyone can convert, regardless of income.
There has been a critical 2025 update: Under current law (since the TCJA of 2017), you cannot “recharacterize” a Roth conversion. Once you convert, it’s permanent. You cannot undo it and avoid paying the taxes. This makes the decision much more consequential than it was before 2018.
The conversion calculus has changed
When I initially analyzed Roth conversions back in 2018, the math didn’t favor conversion for someone in my situation. But now, after several years of retirement and reviewing my actual tax returns, I have a much clearer picture. That doesn’t mean that I would have made a different decision, but it may affect you.
Here are some key factors to consider in 2025:
- Your current marginal bracket: With permanent tax brackets (as far as we know), you have more certainty about conversion costs.
- Expected retirement bracket: The generous senior deductions mean your effective rate may be even lower than you think. Run actual scenarios with current deduction amounts. You may be surprised.
- Source of funds to pay conversion taxes: This is critical. If you must use IRA money to pay the taxes, conversions rarely make sense. If you can pay from non-retirement savings, the math improves significantly.
- Time horizon: The longer before you need withdrawals, the better conversions look. If you’re already in retirement and taking distributions, the window is much narrower.
- RMD impact: If you’re approaching RMD age (73 for most, 75 for those born in 1960 or later), converting can reduce future RMDs. But remember, you can also use QCDs to manage RMDs very tax-efficiently.
- State taxes: Don’t forget state tax implications. Some states don’t tax retirement income; others do.
- Medicare IRMAA: Large conversions can trigger Income-Related Monthly Adjustment Amounts on Medicare premiums two years later. This effectively increases your conversion cost.
The QCD option
Here’s something I didn’t fully appreciate back in 2018 because I was a few years from being eligible to use them: Qualified Charitable Distributions (QCDs) often eliminate the need for Roth conversions for retirees who give charitably.
If you’re 70½ or older, you can make QCDs up to $108,000 per year (2025 limit, indexed for inflation). QCDs:
- Count toward your RMD
- Never show up in your AGI
- Reduce taxable income even if you don’t itemize
- Avoid the new charitable deduction floors
- Don’t trigger IRMAA or Social Security taxation thresholds
For generous givers, QCDs can dramatically reduce effective tax rates—often more efficiently than Roth conversions would have. I explore this in detail in my article on Giving in the OBBBA Era.
Strategic conversion opportunities in 2025
If you do decide conversions make sense, here are the optimal scenarios:
1. The “Gap Years” (Ages 60–72) If you retire before taking Social Security and before RMDs begin, you may have several years of relatively low income. Converting during these years can fill up the 10% and 12% brackets tax-efficiently.
2. Down Market Years Converting when your IRA balance is temporarily depressed means you convert fewer dollars for the same number of shares, paying less in taxes while locking in future tax-free gains on the recovery.
3. The Year Before Medicare If you’re 64 and not yet on Medicare, a larger conversion won’t trigger IRMAA surcharges (though it could affect ACA subsidies if you’re on marketplace insurance).
4. Incremental Conversions Rather than large one-time conversions, consider converting just enough each year to stay in the 12% bracket (or whatever target bracket makes sense). This “bracket management” approach minimizes tax drag.
My current thinking
After years of analyzing this question and now living through actual retirement with actual tax returns, here’s where I’ve landed:
For people like me (retired, most assets in Traditional IRAs, charitable giver, middle income):
- Large Roth conversions don’t make sense, especially if taxes come from the IRA
- Small strategic conversions might make sense in specific years
- QCDs are far more valuable than I initially realized
- The tax arbitrage from contributing at 24–32% and withdrawing at effective rates of 2–6% means that Traditional accounts were the right choice
For younger people (working, in lower brackets, decades before retirement):
- Max out Roth 401(k) and Roth IRA contributions
- The long tax-free growth period is enormously valuable
- Tax diversification provides flexibility
For high earners (above Roth income limits):
- Backdoor Roth conversions remain viable if you earn enough to make them worthwhile
- Consider a mega backdoor Roth if your plan allows it
- Balance traditional contributions for current-year tax savings with long-term Roth benefits
Running your own analysis
If you’re considering a Roth conversion, I recommend:
- Use current calculators: Tools from Fidelity, Schwab, Vanguard, or CalcXML can help you model scenarios. Make sure they’re updated to comply with the 2025 tax law.
- Model multiple scenarios:
- Different conversion amounts
- Different years for conversion
- Different assumptions about future tax rates
- Different sources of funds to pay taxes
- Consider the whole picture: Don’t just look at federal taxes. Include state taxes, potential IRMAA, effect on Social Security taxation, and opportunity cost of funds used to pay conversion taxes.
- Get professional help: If the numbers are close or the decision is complex, pay for a one-time comprehensive analysis from a fee-only CFP or CPA who specializes in retirement tax planning.
- Remember the irreversibility: Since 2018, Roth conversions cannot be undone. Make sure you’re confident before pulling the trigger.
The bigger picture
After writing extensively about taxes in retirement, I’ve come to an important conclusion: most retirees worry far more about taxes than they need to.
The progressive tax structure, combined with standard deductions, senior deductions, and tools like QCDs, means that effective tax rates in retirement are typically very low—even for people like me with substantial Traditional IRA balances.
Yes, we should minimize taxes as wise stewards. But we shouldn’t let tax optimization paralyze us or cause us to make overly complex decisions. Sometimes the “bird in the hand” (keeping your money invested and growing) is better than the “two in the bush” (a hypothetical future tax savings that requires paying a large tax bill today).
Ecclesiastes 6:9a says, “Better is the sight of the eyes than the wandering of the appetite.” The Bible warns us repeatedly about presuming on the future (Proverbs 27:1), and that applies to tax planning too.
Conclusion
The Roth vs. Traditional decision—and the Roth conversion question—aren’t simple, one-size-fits-all answers. It depends on:
- Your current and expected future tax brackets
- Your age and time horizon
- Your charitable giving plans
- Whether you have non-IRA funds to pay conversion taxes
- Your state tax situation
- Your overall financial complexity tolerance
What I can say with confidence, based on both research and personal experience, is that for many middle-income retirees, Traditional IRAs work pretty well, especially when combined with RMDs and QCDs. Tax arbitrage is real, and effective tax rates in retirement are often surprisingly low. I know because I’m surprised by my own!
If you’re younger and in lower brackets, Roth accounts are tremendous. If you’re already retired with Traditional IRAs, don’t lose sleep over not having converted—you may be in a better position than you think.
And remember: faithful stewardship is about using God’s resources wisely for His glory and the good of others. Whether your money is in Traditional or Roth accounts, the goal is the same—to provide for your needs, save prudently, and give generously.
“Each one must give as he has decided in his heart, not reluctantly or under compulsion, for God loves a cheerful giver.” (2 Corinthians 9:7, ESV)