People in the US who want to save money on taxes in retirement may have more time to plan their approach now that the election results are clear.
With Donald Trump as president-elect and Republicans controlling the Senate and the House of Representatives, it is more likely than not that income taxes will stay the same or go up in 2026, when the Trump tax cuts from 2017 end.
That’s a big change for people who are putting money into a Roth IRA or saving for retirement.
People move money from regular IRAs to Roth IRAs, but they have to pay taxes on it at the current rates because the money was already taxed. If the rates from the Tax Cuts and Jobs Act of 2017 are allowed to end at the end of 2025, rates will go back to being higher than they were before. But financial experts say that if the tax cuts are extended, people who want to take advantage of the lower tax rates won’t have to hurry.
The owner of Keil Financial Planners in Milwaukee, Jeremy Keil, said, “Instead of stuffing all your Roth conversions in 2024 and 2025, it looks like you can probably continue to spread them out.”
Before the election, Keil was talking to some clients about moving $200,000 and $300,000 to a Roth IRA in 2024 and 2025, and getting ready to pay the taxes that would go along with it. Now he’s going to make new plans to move the money in $50,000 and $100,000 chunks every year instead. He said that when the rest of the clients’ money is taken into account, the conversions in those amounts will help them avoid having to pay higher Medicare fees.
Keil did a $100,000 change last year for a client. Now that the election is over, he said he would put $7,000 into the client’s Roth IRA account this year.
Roth IRAs may be a good choice for people who think they will be taxed more heavily when they leave. If someone can’t put money into a Roth IRA because they make too much, they can move money from a regular IRA to a Roth IRA. This lets them pay taxes on their retirement savings earlier, which saves them money in the long run.
Robert Stromberg of Mountain River Financial in Abington, Pa., said it can be hard to figure out how much money to put into 401(k)s, traditional IRAs, and Roth IRAs because of things like a person’s age, job goals, and investment portfolio.
And now that the election is over, he said, “it’s very easy to say that it has completely taken away the urgency of hammering Roth contributions and trying to make your desired Roth conversions.”
The details of any tax bill in 2025 are still not clear. Advisors also stressed that the result of the election won’t change the long-term benefits of having a pot of money ready to come out tax-free in future years. It’s still a long-term plan whose goal is to keep tax bills from going up too much.
But some savers might be able to start to think about what they can do. Stromberg planned to spend some money this year on Roth conversions, but because of the election results, he’s not going to spend the rest of that spending on some of his clients. “Let’s hit pause and see how things go from here,” he said.
How Trump’s tax cuts change plans for retirement
Because of the Tax Cuts and Jobs Act, taxes were changed in many ways. One effect was that income tax rates changed. Five of the seven income tax rates went down, with one band going from 28% to 24%.
When you move money from a tax-deferred IRA to a Roth IRA, it is taxed as regular income, like pay or interest on a bank account. Smart people say that you should have cash on hand to pay the tax on the funds that were changed. The high point of 24% is important to a lot of people because the next high point of 32% is such a big jump.
Cathleen Tobin of Moonbridge Financial Design in Rhinebeck, New York, said, “That conversion costs a lot.” Some very wealthy families might be able to get above the 32% level, because they might end up in an even higher level later, she said. “But in general,” she said, “you want to keep that last dollar in the 24% bracket.”
People should not forget about state income taxes when planning their taxes and when the time comes, said Michael Lofley of HBKS Wealth Advisors. He said that different state rules may apply, and if someone is moving soon to one of the few states that doesn’t have income taxes, it might be best to wait to convert or take the distribution until after they move.
Jonathan Traub, a managing partner at Deloitte Tax, says the rates are “fairly likely” to stay the same. “Not 100%, but pretty high.”
But lawmakers also have to deal with a huge and growing government budget deficit. In fiscal 2024, the deficit will be over $1.8 trillion, up from $1.7 trillion the previous year. Traub said they will have to think about how much more they want to borrow. He said that shortening the time that the next tax bill is in force is one way to keep the cost of tax cuts down.
The temporary parts of the 2017 tax cuts will end after eight years. The new bill, on the other hand, could last for three to five years, according to Traub.
Trump’s campaign promise to not tax Social Security payments is another thing that could be taken into account when planning your retirement taxes. Traub said it was “pretty low likely” that the tax break would be included in the bill.
More time for Roth IRAs and writing your will
People who work in the financial world say that the open questions show why Roth changes are a good long-term plan.
Trent Porter of Priority Financial Partners in Durango, Colo., said that folks didn’t just move money into a Roth IRA because tax rules were ending. He said, “It just gave us a little more drive to do it.” But “it doesn’t drastically change the calculus” even though Republicans are likely to win the White House and Congress.
Porter said he thinks about 10, 15, and 20 years from now, and sometimes even much longer when it comes to estate planning.
The Trump tax cuts doubled the amount that wasn’t taxed before gift and estate taxes were added. The amount will go up to $13.99 million per person in 2025. Merrill Lynch says that if Congress didn’t do anything, the amount would drop back to about $7 million.
A lot of very wealthy families were already planning their estates for 2026, and the race for president made the trend stronger. Then the election came around.
With the election over, Traub of Deloitte said that estate taxes are expected to stay the same. “I believe the present exemption amount is safe,” he said.
Porter said some of his clients have said, “OK, we’ve got some time,” because they see the election results as a reason to put off planning their estates.
