Picture this: You're at the pearly gates of financial heaven, but instead of Saint Peter holding a ledger, you've got Uncle Sam with a calculator in his hand. Before you get in, he’s going to add up everything you owe. For those of you that have done a decent job of saving in your retirement accounts, the cost of entry may be a mighty cross to bear. But what if I told you there's a way to baptize now and avoid that hefty tax bill later? That’s right, folks—I'm talking about the holy sacrament of Roth conversion.

With the IRS recently handing down its commandments on required minimum distributions (RMDs) for inherited IRAs, and the expiration of the 2017 Tax Cuts and Jobs Act at the end of 2025, it’s time for those with substantial tax-deferred accounts to consider a financial conversion of biblical proportions.

Why Should You Convert?

Think of the current marginal tax rates as manna from heaven—delicious, limited, and probably not coming back anytime soon unless Republicans sweep the House, Senate, and White House this November. The 2017 Tax Cuts and Jobs Act lowered most tax brackets by 1% to 4%, a blessing for anyone looking to minimize their tax burden. But like all good things, these rates came with an end date in 2025. Come 2026, they’ll likely go back to their old, harsher ways—think fire and brimstone for your wallet. That’s why now is the time to convert your traditional IRA into a Roth IRA and lock in those heavenly tax savings.

For an illustration of the power of converting retirement account assets, let’s look at an actual couple, both 58, that have about $6.5 million in IRAs between a husband and wife. In the first illustration (Exhibit 1), the couple optimizes their taxes by converting a portion of their IRAs up the upper threshold of the 24% tax bracket ($383,900 of taxable income in 2024 for Married Filing Jointly) at the end of each year, a process they repeat annually until they reach the age of 73, when RMDs kick in. I assumed that current tax rates remain intact and inflate by an average of 2.5% over the rest of their lifetimes. In this illustration, paying more taxes now could potentially save $1,594,819 in taxes, particularly in later life when RMDs are higher and the first spouse has passed away.

Exhibit 1. Annual Roth Conversion Up to 24% Threshold, Current Tax Rates

Illustration is not tax advice. Screenshot from Envestnet MoneyGuide financial planning software.

The second illustration only changes tax rates, which will return to 2017 levels by 2025 (the 24% upper threshold drops to $233,350 for MFJ). If Congress doesn't pass new legislation to extend the 2017 Tax Cuts and Jobs Act (TCJA), we will face this outcome.

Exhibit 2. Annual Roth Conversion Up to 24% Threshold, Tax Rates Reverting to Pre-TCJA Levels in 2026

Even though both conversion strategies save the clients a significant amount of money, if the current tax rates expire in 2025 and return to their pre-TCJA levels, they will save about $335,000 less.

Either way, by taking the tax hit now through a Roth conversion, you can set yourself up for years, even decades, of tax-free growth and distributions—a financial afterlife where the tax man can’t reach you.

Inherited IRAs: A New Covenant

Another law passed in 2019, the “Setting Every Community Up for Retirement Enhancement (SECURE) Act," changed how retirement accounts (IRAs, 401(k)s, etc.) must be distributed when a non-spouse inherits them.

The new IRS rules have made IRAs about as appealing for wealth transfer as the locusts were for Pharaoh. Unless you’re leaving your IRA to a charity, where it’ll be received tax-free, IRAs have lost their luster for estate planning. Starting in 2020, non-spouses that inherit a retirement account after the original owner began taking RMDs have just 10 years to empty it, usually over years one through nine.

For those who inherited IRAs in 2020 and held off on distributions while waiting for the IRS’s rules, here’s some positive news: You won’t face penalties for missed RMDs, and you don’t have to make up for lost time. But if you inherit a large IRA in 2020 that is under the 10-year rule, should you just take the minimum? Probably not. By tax tithing now, that is paying taxes on retirement accounts at lower rates, when possible, Uncle Sam will still get his fair share but not some of the windfalls that a lack of planning can result in.

Some may believe they’ll be in a lower tax bracket in retirement, but as my illustrations above show, RMDs can easily push a retiree back into the same or higher brackets they were in during their peak earning years.

There could also be a concern about how a Roth conversion might affect Medicare’s income-related monthly adjustment amount (IRMAA). While the higher IRMAA payments may seem unfair if you choose to increase your income now, the taxes you'll save over a lifetime of Roth withdrawals far outweigh the additional IRMAA. Better to endure a few years of slightly higher payments than a lifetime of tax purgatory.

The key to salvation in tax planning is consistently taking advantage of low tax brackets year after year. Now go forth and convert.