Why Now is the Time for a Roth Conversion: A Look at the History of Tax Rates

Understanding the history of U.S. income tax rates helps frame why today’s historically low rates make it an ideal time to consider a Roth conversion. Since the inception of federal income tax in 1913, rates have fluctuated dramatically, driven by war, economic policies, and political ideologies. Today, rates are near historic lows, making proactive tax planning critical.

The Golden Era of High Tax Rates

In the mid-20th century, the U.S. tax system was vastly different. By the 1950s, the top federal income tax rate exceeded 90%, applicable to income over $200,000 (roughly $2 million in today’s dollars). Notably, actors like Ronald Reagan felt the impact directly. Earning $100,000 per movie, Reagan famously limited himself to two films per year, knowing that any additional income would fall into the 91% bracket, leaving him with little incentive to work more.

This steep tax policy wasn’t limited to Hollywood. High earners across all industries faced similar disincentives, influencing decisions on investments, work, and savings. While such rates were designed to fund government programs and rebuild after World War II, they stifled economic growth and innovation in certain sectors.

The Evolution of Lower Rates

The landscape began shifting in the 1960s and 1980s. Under the Kennedy administration, the top rate dropped from 91% to77%, and later to 70%. The real overhaul came with the Reagan administration in the 1980s, where top rates fell dramatically—from 70% in 1981 to 50% in 1982, and ultimately to 28% by 1988. This period saw significant tax reform, emphasizing economic stimulation through lower tax burdens.

Since then, the highest federal income tax rate has hovered between 28% and 39.6%, with recent years stabilizing at 37%. The Tax Cuts and Jobs Act (TCJA) of 2017 further reduced rates and broadened the income brackets. These provisions are set to expire in 2026, likely resulting in higher taxes for most Americans.

Why Roth Conversions Make Sense Now

Today’s tax environment presents a unique opportunity. With historically low rates and the sunset of TCJA approaching, locking in taxes at current rates can be a strategic move. A Roth conversion allows you to pay taxes now on pre-tax retirement savings, shielding future growth and withdrawals from taxation. This strategy is particularly advantageous for those expecting higher income, tax rate increases, or changes to deductions and credits in the future.

Beyond low rates, converting to a Roth IRA offers additional benefits. Roth accounts don’t have required minimum distributions (RMDs), allowing retirees greater control over their income in retirement. Plus, tax-free withdrawals can provide flexibility for estate planning or managing tax brackets.

The Bottom Line

History shows that tax policy is far from static. The 91% tax rates of the 1950s are a stark contrast to today’s 37%. With this window of low rates potentially closing, a Roth conversion is an actionable way to optimize your tax strategy and secure long-term financial benefits. Speak with a financial advisor today, at no cost to you, to assess your situation and take advantage of this historic opportunity.