Uncertainty is the bane of the stock market, as well as tax planners and investors everywhere. Throughout the 2024 Presidential Election Cycle, prognostication became increasingly difficult as proposals, trial balloons, polls, and candidate swaps supplied a plethora of conflicting concerns. Nothing was certain, planning was difficult, and markets were understandably volatile.
Fortunately, the election is (virtually) over, giving markets and people time to assess results and refine financial planning prior to year-end. In the 2024 election, one of the main uncertainties revolved around the future of the 2017 “Trump Tax Cuts.” Due to arcane Senate rules, our current low rates are set to sunset after 2025, at which time Personal Income Tax Rates would automatically rise.
For purely political reasons, election results would pave the way for either continuing lower rates or the expiration of those rates with the resultant tax increase. With election results now known, tax rates will most likely not rise in 2026. This opens up a new discussion regarding tax planning, and especially the viability of Roth IRA Conversions. Here’s a look at our thought process.
Following introduction of the Roth IRA in the 1997 Taxpayer Relief Act, Roths have been helpful for many American taxpayers, due to forever-untaxed withdrawals offered to account owners who follow simple rules. People in low tax brackets could save for a future in which tax rates would be higher, and their withdrawals would remain tax-free.
Converting Traditional Retirement funds to Roth status creates a 1-time taxable event, but the long-term tax-free status can be very valuable. This is especially true in the face of impending higher tax rates, which would have been the case if our election results were different. Our clients have been very interested in the concept, as they should be. However, the immediacy of the discussion has been reduced because of the steadiness of tax rates. In fact, Trump (47) has expressed a willingness to cut rates even further.
Tax and Investment Planning shrouded by uncertainty can lead to expensive (and irreversible) actions by investors. As we settle into year-end planning, pressure to take some actions is reduced, or even eliminated. Most of us are relieved and feeling less pressured.
Naturally, Tax Planning is a complex and multi-faceted process. As more decisions are made and published, we face reduced uncertainty, making planning considerably less complex. We are watching for any and all details of further changes coming to the Tax Code. After all, the only thing certain about taxes is change.
All in all, early data presents a mixed bag. We’ll keep you updated.
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