With just hours remaining until the calendar flips to 2026, retirement savers face an important deadline: December 31 is the last day to complete a Roth conversion for the 2025 tax year. And given the uncertain tax landscape ahead, this deadline carries more weight than usual.
Unlike traditional IRA contributions, which can be made until the April tax-filing deadline, Roth conversions must be completed within the calendar year to count for that year's taxes. There is no grace period, no extensions, and no exceptions.
For savers who have been contemplating a Roth conversion, the next 24 hours represent a closing window that may not reopen under the same favorable conditions.
Why the Urgency?
Several factors make the 2025 deadline particularly significant:
Expiring Tax Rates
The Tax Cuts and Jobs Act of 2017, which lowered individual income tax rates across most brackets, is scheduled to sunset at the end of 2025. Unless Congress acts to extend these provisions, tax rates will automatically revert to their pre-2018 levels on January 1, 2026.
For many taxpayers, this would mean:
- The 12% bracket returning to 15%
- The 22% bracket returning to 25%
- The 24% bracket returning to 28%
- The 32% bracket returning to 33%
- The 35% bracket returning to 39.6%
While the new administration has signaled support for extending the current rates, nothing is guaranteed. Political dynamics and fiscal constraints could complicate any extension legislation.
The Math of Conversion
A Roth conversion involves moving money from a traditional IRA or 401(k) into a Roth IRA. The converted amount is taxed as ordinary income in the year of conversion, but future growth and withdrawals from the Roth are completely tax-free.
The strategy makes the most sense when you expect to be in a higher tax bracket in the future than you are today. With rates potentially rising in 2026, converting in 2025 locks in today's lower rates on the converted funds.
Consider a simplified example: A taxpayer in the 24% bracket who converts $50,000 would pay $12,000 in federal taxes on the conversion. If that same conversion happened in 2026 after rates rise to 28%, the tax bill would jump to $14,000—an additional $2,000 for no additional benefit.
Who Should Consider Converting?
Roth conversions aren't right for everyone. The strategy tends to work best for:
Lower-income years: Taxpayers experiencing temporarily low income—perhaps due to early retirement, a career transition, or a gap year—can convert at lower marginal rates than they'll face in the future.
Large traditional IRA balances: Savers with substantial traditional IRA assets face potentially massive required minimum distributions (RMDs) in their 70s and 80s. Converting some of those funds now can reduce future RMDs and the associated tax burden.
Estate planning: Roth IRAs offer superior estate planning benefits. Unlike traditional IRAs, Roths have no RMDs during the original owner's lifetime, allowing the account to grow tax-free for longer. Heirs who inherit Roth IRAs receive tax-free distributions.
Long time horizons: Younger savers who convert have more years for tax-free growth to compound. The longer the Roth funds can grow untouched, the more valuable the tax-free treatment becomes.
The Mechanics
Completing a Roth conversion is straightforward but must be done carefully:
First, contact your IRA custodian (Fidelity, Schwab, Vanguard, etc.) to initiate the conversion. Most custodians offer online conversion tools that can process the transaction same-day. Phone conversions typically take longer but are also available.
Second, decide how much to convert. Partial conversions are allowed—you don't have to convert your entire traditional IRA balance. Many advisors recommend converting just enough to "fill up" your current tax bracket without pushing into the next higher one.
Third, plan for the tax bill. The converted amount will be added to your 2025 taxable income. Ideally, you should pay the resulting taxes from funds outside the IRA to avoid reducing the amount that grows tax-free.
Watch the Clock
Timing is critical. The conversion must be complete—meaning the funds must leave your traditional IRA—by December 31, 2025. This is based on when the transaction settles, not when you initiate it.
If you're converting investment holdings (rather than cash), allow extra time for the assets to sell and settle. Most equity trades settle in one business day (T+1), but you don't want to cut it close.
Wire transfers and electronic conversions at the same custodian are typically fastest. Transfers between custodians may take several days and could miss the deadline if initiated too late.
The Five-Year Rule
One important caveat: Roth conversions are subject to a five-year holding period before the converted funds can be withdrawn tax-free and penalty-free. This means funds converted in 2025 cannot be withdrawn without penalty until 2030.
This rule applies to each conversion separately. If you convert funds in multiple years, each conversion has its own five-year clock. However, earnings on converted funds are always subject to the five-year rule and must wait until age 59½ for penalty-free withdrawal.
The Bottom Line
The December 31 Roth conversion deadline arrives at an unusually consequential moment for tax planning. With the potential for higher tax rates in 2026 and beyond, locking in a conversion at today's rates could save thousands of dollars over time.
However, Roth conversions require careful analysis of your specific situation. The upfront tax cost, your time horizon, your expected future tax rates, and your overall financial plan all factor into the decision.
If you've been on the fence about converting, the next 24 hours are your last chance for 2025. Once the clock strikes midnight on New Year's Eve, this particular opportunity disappears—and may not return under the same terms.
