Investing and the Sun Setting of the 'Trump' tax cuts in 2025

In My Humble Opinion
1

As an investor, are you factoring in the sunset of the 2018 Tax Cuts and Jobs Act (TCJA) (AKA Trump Tax cuts) at the end of 2025?

As background, a friend is a financial planner and he asked me to attend one of his presentations to help with set up, IT, etc. I was surprised that much of his pitch (to this audience at least) was that we are current in a ‘tax sale’ (his phrase) and that taxes would almost certainly go up starting in 2026 due to the automatic sun setting of the TCJA provisions. If that holds true, than the most effective way to benefit from this situation was to convert ones 401(k) to a Roth 401(k), and pay the (presumably lower) taxes now. The same would hold true for Traditional IRA to Roth IRA conversions. He advocated for this strategy even if one wouldn’t have otherwise do this due to the limited future growth potential that older investors would have had.

Are other Dopers utilizing this, or otherwise considering the sun setting of this tax reduction into their financial planning?

2

I looked into doing this just before I retired in 2020. The one time withdrawal would have taken a much bigger bite in taxes than if I withdrew my pretax 401K in 25 bites over 25 years. The one time withdrawal would have cost me almost 20% of my total pretax 401K value, the 25 bites would have cost me less than $200 a year in higher taxes. I didn’t figure in the potential loss of income that that lost money would have cost me versus what it would make me by still being in my 401K. But I would guess that would be a nice chunk of change.

3

As a general matter, if you have a big non-Roth 401k (or IRA; the laws are more or less equivalent), AND you have it invested for growth, AND you are recently retired AND are not drawing social security yet, there IS a window of opportunity to make large optional conversions from your traditional accounts into Roth accounts while your taxable income is especially low.

If you’re the kind of person who’ll be facing $100K+/year RMDs when you’re 73 or 75, better to eat at least some of that elephant earlier at age 65-74 by making conversions then while you’re in a much lower tax bracket. Once you start taking SS (no later than 70) and paying taxes on it too, you’ll have less headroom for early conversions, but that’ll still be more headroom than you’ll have once your RMDs kick in exceed your actual income needs.

The point is if you don’t do early conversions you’ll “waste” the low marginal tax rates now while in your early retirement years your taxable income is only $30K, but it’ll later be $150+K due to SS and RMDs. if you voluntarily bump your taxable income with conversion up to say $150K for that 5-8 year span, you’ll have eaten the traditional 401k/IRA accounts down to the point the RMDs won’t be ginormous and therefore taxed at the highest of marginal rates. Overall you’ll spend more years paying for your IRA/401k withdrawals at lower marginal rates.

Here’s an article on the topic by a pro I’ve followed for years:

The article dates from 2016, so the specific tax rates and brackets mentioned have of course changed. But the concept remains fully valid nonetheless; only the thresholds for action have changed.

As to me specifically, I just retired and will probably make hefty conversions to Roth each year for just those reasons.

All of the above is irrespective of any changes in tax rates that might occur in some future year.


As to the thesis of the OP’s pal for non-retirees or for people already past their RMD commencement age I will comment that Reagan’s tax cuts had a sunset provision. Which sunset was extended indefinitely when it came up. Bush II’s tax cuts had a sunset provision. Which sunset was extended indefinitely when it came up. I have no doubt the current sunset will somehow disappear as well.

My expectation is that’s a person selling his ideas to a comfortably well-off mostly right-leaning audience who just loooove to worry about “tax rates will EXPLODE during the next couple of years” Hint: They won’t.

4

As someone who works in the financial markets, although definitely not as a high net worth advisor, this is exactly what it smells like. A high net worth financial advisor MAY have some clients they wish to discuss this with one on one, but if they’re regular ongoing seminars, it is starting to smell like ‘BEWARE OF DEMOCRATS!’

5

Does this mean we will be getting our exemptions back? As people that itemized, combining the deduction and exemption together into one giant bulldog standard deduction screwed us over (typical you’re middle class so F you tax law change)

6

Wow. I didn’t get that at all during the brief, and I was surprised to see this morph into a political discussion. How one would know or surmise that this was presented to a “mostly right-leaning audience” is beyond me. So much for a politics neutral discussion.

7

You don’t understand! The Dems are stealing elections. If unchecked, they will have supermajorities in both the House and the Senate when AOC annexes the Office of President on 1/20/29. Then they will charge all Republicans with 100% tax rates before throwing them into camps.

Am I serious or is this Poe’s Law?

I think there is a real possibility that tax rates may shift. Republicans shift them to make poor and middle-class pay more while Democrats shift them to make rich and middle-class pay more. Based on history I would expect the effective rate for MC to go up. Explode? Probably not but enough to consider between paying taxes now or later.

8

As a former advisor who’s sat through dozens of sales presentations, the financial advisor demographic most certainly leans strongly right, and loves to beat the “beware of future tax hikes!” drum - ESPECIALLY if the solution they’re trying to sell is a massive back door Roth IRA conversion. Discussing the boogeyman of future tax rates, it’s nearly impossible for them to not become partisan sniping sessions at some level. The better the advisor, the less this takes place.

American Funds was one of my favorite mutual fund families to work with, and they had a fantastic brochure that broke down market returns by presidential term. There was virtually no discernible difference, with the Dems slightly in the lead. I liked to pull it out in 2016 to assuage people of either political persuasion that the market wasn’t about to come to a screeching halt if The Other Guy won.

9

Amazing that you weren’t there, you don’t know where it was, but you’re certain that it “leans strongly right.” :roll_eyes:

Secondly, what could this possibly have to due with the question posed, or is this just a target of opportunity to politically bash one side or the other on a non-political post?

10

I believe you may have misread my post - I was referring to the entire advisor industry. Your buddy may be a committed lefty liberal like me - but that doesn’t change the fact that “the financial advisor demographic leans heavily right”, as I said.

Either way, your question was quickly answered in the first few responses.

11

I’ve worked in the markets for 17 years. ‘Beware!! The Bogeyman is Coming’ type of seminars like this are almost always loaded with a right wing slant.

12

My point, and I’m sorry it’s been amplified quite this much is not so much about politics qua politics. I should have said that better.

It’s that these sorts of seminars are aimed at the moderately affluent. Do drive a Mercedes, don’t drive a Rolls. Do take international vacations, but not by private jet. Multiple 6-figure incomes, and multiple 7 figure net worths. IOW, the country club set. Not the middle class factory or clerical worker.

That crowd is extremely irrationally allergic to taxes. And they are certain to their bones that taxes are going up lots, and going up soon. Every time. Scaring those folks with a claim taxes are going up soon is as easy as saying “boo” and watching them all jump.

It’s trivially easy to get them to believe the presenter’s premise of imminent tax rises. That was what I was trying to say.

And once they’ve bought into the presenter’s premise, then it becomes extremely easy to sell them whatever the presenter is selling. For darn sure the presenter isn’t doing this for the public good. There’s selling going on. Which is not saying they’re evil, merely that they’re skilled at selling the thing they have to sell to the sort of audience who’s likely to buy.

13

Copy all LSLGuy

But in regard to this:

The tax cuts in question automatically sunset and revert back to the 2017 brackets and inflation adjusted levels by law. No action is required for this to happen. New legislation would be required to enact new tax cuts. With this as a given, don’t you believe that tax cuts are indeed likely? Or do you believe this evening divided Congress will pass new tax cuts with new tax brackets. Tax cuts that would require significant Democrat support?

With this, don’t you believe that a tax rise is imminent?

14

You raise a good point I had not fully considered. Namely that with this particular extremely dysfunctional Congress, and no real reason to expect the folks seated in late 2024 will be much better, there is indeed a decent chance that gridlock prevents legislation that would in turn prevent the sunsetting.

Thanks for pointing that out.

At the time the 2018 TCJA came into effect, it significantly raised my own taxes. That Act was designed to deliver millions of dollars of tax cuts to the über-wealthy, a couple hundred dollars of tax cuts (and a bunch of dollar-neutral tax simplification) to Joe SixPack, and partly balance the books on the backs of the 6-figure wage earning households. With a double whammy for those in CA, MA, NJ, & NY although that extra FU didn’t affect me here in FL.

I’ve since retired and my personal circumstances now are such that I’d personally probably benefit from things remaining as they are versus sunsetting and reverting to pre-2018.


IMO the questions for anyone considering taking any action in advance of any potential tax change are:

  1. How much money can be gained if I do the right thing?
  2. How much money might that cost me if I mis-predict the future?
  3. How much hassle would taking this proposed action be?
  4. What are the time limits for acting? IOW, can I wait to see what really happens and then still react appropriately before the end of the year or whenever? If not, what’re the latest date(s) I can take (or skip) actions while the future still remains uncertain?

So overall, forewarned is forearmed. One could make TY2023 recharacterizations between now and April 2024, make TY2024 recharacterizations up until April 2025,and TY2025 recharacterizations up until Apr 2026 safely under current law. Recharacterizations are simple and easy administratively, should be zero cost in and of themselves, and you can raise the cash to pay the incremental taxes as part of the same transactions if needed.

So my view is the answer to 3 is “minimal” and to 4 is as I’ve described: 4, 16, and 28 months from now. Depending on the rest of your income / tax bracket / assets situation, you may not cost yourself much by skipping this first deadline while waiting to better read the still-distant tea leaves.


I now think I’ll have to run these numbers to see for sure. And it might well make sense for lots of Americans to do the same.

But as I said upthread, I’m already planning significant taxable recharacterizations in TYs 2024 through 2032 for my own reasons irrespective of tax rate changes, whether from TCJA sunsetting or from anything else the Cockamamiest of Congresses chooses to enact.

15

Yes. This is exactly what I am doing and it has nothing to do with the end of tax cuts in a couple of years. I don’t see how the 2025 changes have anything to do with that strategy. You should be doing it anyway.

16

Well, you should be if you’re in the exact right group to do it. IOW: retired, below RMD commencement age, not drawing SS yet, and not drawing much if any taxable pension.

If any of those 4 things are not true then the only reason to act is if you are taking a position on major tax increases in 2025 & subsequent and no material reduction or giant increase in your taxable income between now and then.

17

Tell me about this. I was going to take my SS in 3 months at 62, but I have $1M in an IRA that needs yearly conversions to Roth. Will that screw me in taxes? CFP said he wants to keep my taxable income under $89k doing the conversions, so obviously do it over years of time.

Obviously I can bring this up with him, but would appreciate background. Thanks.

18

Read the article cited in my post #2 of this thread. And read my comments adjacent to it for context.

The overarching point is that you will be paying something in taxes on every one of those $1M. Over some span of years. Some folks consider paying a dollar any earlier than absolutely necessary to be “getting screwed” even if paying that dollar today saves them $5 in taxes later. A smarter person recognizes that paying less earlier can (not must) be an advantage depending on all the other factors: time value of money, future tax rate changes, etc., etc.

That article provides enough guidance for you to do the math based on your personal circumstances.

Also note that although the tax advantages of early conversions in early retirement are real, they might not be compelling enough to bother with. Which depends a LOT on the rest of your personal circumstances, legacy intentions, etc.

19

I must point out that the article ran too early to consider the effect of the ACA, and it turns out that is hugely significant for my situation. Basically, health insurance premiums are incredibly strongly affected by income, such that a 20% increase in income could quadruple your insurance premiums. I’m not kidding. So my main goal is to reduce my AGI as much as possible to keep insurance reasonable, until I qualify for Medicare.

20

Excellent point. Thank you for bringing it into the picture.

That tax feature (IRMAA) totally is a factor and should be included in any calc for 2023 and subsequent.

However, it important to keep that in perspective. Ramping your taxable income by 300K that saves you 30K in taxes 10 years hence but costs your 8K in extra IRMAA premiums this year is still a profitable decision. Just not as profitable as it would have been if IRMAA did not exist.

Here’s a blog post on exactly that topic from that same source. YMMV of course.