What Does a Trump Presidency Mean for Roth Conversions?

‍

With Donald Trump’s return to the White House, there are many questions about the impact on retirement planning, especially regarding Roth conversions. As a Certified Financial Planner®, I often recommend Roth conversions as a way to minimize lifetime taxes. However, tax policies can shift significantly depending on the administration, so it’s important to reassess your strategy when changes occur. In this post, we’ll discuss how Trump’s presidency might affect Roth conversions and explore broader implications for your retirement and tax planning.

‍
‍

Understanding Roth Conversions
‍

Before diving into potential policy changes, let’s briefly review what a Roth conversion is and why it matters:
‍

• A Roth conversion involves transferring funds from a pre-tax retirement account (like a 401(k) or traditional IRA) to an after-tax Roth IRA.
• This strategy allows you to pay taxes on the converted amount now, avoiding potentially higher taxes on withdrawals in the future.
• Roth conversions can be particularly beneficial if you anticipate being in a higher tax bracket later due to required minimum distributions (RMDs) or other factors.
  ‍

By making Roth conversions strategically, you can better control your taxable income and ensure your retirement savings last longer.
‍

The Impact of Trump’s Tax Policies on Roth Conversions
‍

The Tax Cuts and Jobs Act (TCJA)
‍

Trump’s Tax Cuts and Jobs Act (TCJA), passed in 2017, made significant changes to the tax code, including:
‍

• Lowering federal income tax brackets.
• Increasing the standard deduction, which reduced the number of taxpayers itemizing deductions.
  ‍

However, most provisions of the TCJA are set to expire at the end of 2025, reverting to the pre-2017 tax code in 2026. But with Trump’s return to office and Republican control of Congress, there is a strong likelihood that the TCJA could be extended or made permanent. This could have profound implications for Roth conversion strategies.
‍

Flexibility in Timing
‍

If current tax brackets are extended, you may no longer need to accelerate Roth conversions before 2025. Instead, you could spread conversions over several more years, optimizing your tax exposure annually. This flexibility helps balance conversion amounts with other income to avoid pushing yourself into a higher tax bracket.
‍

Standard Deduction vs. Itemized Deductions
‍

The TCJA increased the standard deduction significantly, leading most Americans to forgo itemized deductions. If the standard deduction remains at current levels:
‍

• Pros: Easier to predict your taxable income and plan Roth conversions accordingly.
• Cons: If the state and local tax (SALT) deduction cap is lifted, more taxpayers might find itemizing beneficial, adding complexity to income projections.
  ‍

IRMAA Surcharges
‍

An often-overlooked factor in Roth conversion decisions is the Income-Related Monthly Adjustment Amount (IRMAA):
‍

• This is a Medicare surcharge applied when your Modified Adjusted Gross Income (MAGI) exceeds certain thresholds.
• Roth conversions increase your MAGI, potentially triggering IRMAA surcharges two years later.
  ‍

Planning conversions to avoid IRMAA thresholds is key to minimizing overall retirement costs. The TCJA did not make changes to IRMAA, and no changes are anticipated with Trump's return to the White House as of yet.
‍

Social Security Taxation
‍

Trump’s campaign hinted at eliminating taxes on Social Security benefits. While speculative, such a change could influence the timing of claiming benefits:
‍

• Current strategies often involve delaying Social Security to minimize taxes while performing Roth conversions.
• If benefits become tax-free, claiming earlier could make more sense for many retirees.
  ‍

Risks to Consider
‍

While the continuation of the TCJA would provide opportunities, it’s essential to weigh the risks:
‍

1. Potential Repeals: Future administrations could repeal or modify tax laws, altering Roth conversion advantages.
2. Roth Withdrawals Taxation: Some fear the government could tax Roth withdrawals in the future, though this is unlikely based on current policies.
3. Economic Uncertainty: Budget deficits may pressure lawmakers to find new revenue sources, possibly impacting retirement accounts.
   ‍

Key Takeaways for Roth Conversion Strategy
‍

To navigate these uncertain waters, consider the following steps:
‍

• Evaluate your tax bracket: Assess whether current or future brackets make conversions more advantageous.
• Project future income: Incorporate potential RMDs, Social Security, and other income sources.
• Stay informed: Monitor developments in tax legislation and consult a professional regularly.
  ‍

Benefits of Roth Conversions
‍

• Tax-free withdrawals in retirement.
• Reduced RMDs, helping control taxable income in later years.
• Flexibility to manage income in retirement.
  ‍

Final Thoughts
‍

Trump’s presidency could bring significant changes to the tax landscape, making it more important than ever to revisit your retirement planning strategy. While extending the TCJA offers potential opportunities for Roth conversions, individual circumstances vary widely.

Always consult with a qualified financial professional to create a tailored plan that aligns with your goals and mitigates risks.

If you found this information helpful, subscribe to our blog and YouTube channel to stay updated. Schedule an intro call to see if we're a good fit to work together!

‍