The top federal rate is now permanent, the state and local tax deduction phases out above $505,000 of income, and a Roth conversion touches both. The decision for high earners is no longer about guessing future rates. It is about which year the conversion income lands in.
For years the case for converting a traditional IRA to a Roth rested on a prediction: tax rates would rise when the 2017 cuts expired, so pay the tax now at 37% rather than later at something higher.
That prediction is off the table. Legislation enacted in July 2025 made the seven individual rates permanent, and for 2026 the 37% bracket begins at $640,600 of taxable income for a single filer and $768,700 for a married couple filing jointly. IRS: 2026 inflation adjustments, Rev. Proc. 2025-32
Yet the same law added two features that make the timing of a conversion matter more, not less, for owners and executives in the top brackets. The question has shifted from whether to convert to which year the income should appear.
What a conversion actually does
A conversion moves money from a traditional IRA or 401(k) to a Roth account. The amount converted is ordinary income in the year of the transfer, taxed at the owner's marginal rate. In exchange, qualified withdrawals from the Roth are tax free, and the owner has no required minimum distributions during life. Since 2018 a conversion cannot be undone; the recharacterization window that once allowed a do-over is closed. Internal Revenue Code §408A
Each converted amount also carries its own five year clock. A withdrawal of converted principal within five years, by an owner under 59 and a half, can draw the 10% early distribution penalty even though the income tax was already paid. §408A(d)(3)
The two new reasons the year matters
First, the state and local tax deduction. For 2026 the cap is $40,400, but it phases down by 30 cents for every dollar of modified adjusted gross income above $505,000, reaching a $10,000 floor at roughly $606,000. A $200,000 conversion by a couple at $500,000 of income does not just add $200,000 of taxable income. It also strips as much as $30,400 of deduction, which at a 35% rate is another $10,600 or so of tax. The effective cost of that conversion is well above the headline bracket. Internal Revenue Code §164(b)(6), (7)
Second, deductions themselves are worth less at the top. Beginning in 2026, taxpayers in the 37% bracket lose up to 2/37 of the value of their itemized deductions, and charitable gifts are deductible only above a floor of 0.5% of adjusted gross income. A conversion that pushes income into the 37% bracket therefore also trims the deductions the owner planned to use against it. Internal Revenue Code §68, §170
The practical result is that a conversion landing in a year of ordinary income between roughly $500,000 and $770,000 is now the most expensive place to put it. A conversion that keeps total income under the SALT phase-down, or one that lands in a year already far above the 37% threshold where the deductions are gone anyway, costs less per dollar converted.
Where the good years are
High earners have more low-income years than they expect. The year after a business sale, when the gain was capital and ordinary income drops. A sabbatical or a gap between ventures. The first years of retirement before required distributions and Social Security begin. A year with a large ordinary loss from a real estate or business activity. Each is a window to fill the 24% and 32% brackets with conversion income that would otherwise be taxed at 37% later or, under the ten year payout rule, at an heir's rate. Internal Revenue Code §401(a)(9)(H)
Consider a couple who sold a company in 2025 and expect $180,000 of ordinary income in 2026. The 24% bracket for a joint return runs to $403,550 of taxable income. Converting roughly $220,000 fills that bracket without touching the 32% rate or the SALT phase-down. The same conversion in a $600,000 year would be taxed at 35% and would erase most of the SALT deduction on the way. The figures are an illustration, not advice; the point is that the same dollars can carry two very different price tags.
The costs that hide outside the bracket table
Medicare premiums. Part B and Part D surcharges are set from modified adjusted gross income two years earlier. For 2026 the surcharges begin at $109,000 for a single filer and $218,000 for a joint return, and a couple above $750,000 pays $689.90 a month each for Part B alone. A conversion at 63 shows up in the premium at 65. CMS: 2026 Medicare Part B premiums
Net investment income tax. Conversion income is not investment income, so it does not itself attract the 3.8% tax. It does raise modified adjusted gross income, which can pull the owner's dividends, interest and capital gains over the $200,000 or $250,000 threshold and expose them to the tax. Internal Revenue Code §1411
Estimated payments. A conversion is income in the year it occurs. An owner who relies on the prior year safe harbor, 110% of last year's tax for high earners, avoids the penalty but still owes the balance in April. Paying the conversion tax from outside the IRA, rather than withholding it from the converted amount, keeps the full balance growing tax free. Internal Revenue Code §6654
California conformity
California follows the federal treatment: the converted amount is ordinary income on the California return in the same year, with no preferential rate. The state's top rate is 12.3%, plus an additional 1% on taxable income above $1 million. On a $500,000 conversion in a high income year, the California tax alone can approach $60,000 to $66,000. California FTB: tax rates and tables
Residency changes the answer. Federal law generally bars a state from taxing retirement plan distributions, including conversions, paid to someone who is no longer its resident. An owner who intends to leave California within a few years generally does better converting after the move, provided the move is genuine and documented. An owner who is staying should treat the California tax as a fixed part of the price and concentrate on choosing the federal year well. 4 U.S.C. §114
The decision, in order
Map the next five to ten years of ordinary income, including the sale, the retirement date and the year required distributions begin. Mark the years that fall below the SALT phase-down and the 37% threshold. Convert in those years, in amounts that fill a chosen bracket and no more. Check the Medicare premium two years out and the net investment income exposure in the same year. Pay the tax from outside the account. Then revisit the map every fall, because the brackets, the SALT cap and the owner's own income all move.
The strategy has not become less valuable for high earners. It has become less forgiving of a conversion made in the wrong year.
This article provides general information, not individualized tax, legal, or investment advice. Figures are for 2026 unless stated and are illustrations, not projections. Results depend on the facts and applicable law.
