As we approach the end of 2025, the impending sunset of the Tax Cuts and Jobs Act (TCJA) brings crucial considerations for retirement planning, particularly regarding Roth conversions. This strategic move involves transferring funds from a traditional IRA or 401(k) to a Roth IRA or 401(k), offering tax-free growth and withdrawals in retirement.
Impact of the TCJA Sunset
Aspects of the TCJA, which lowered tax rates for many taxpayers, are set to expire at the end of 2025. This presents a window of opportunity for Roth conversions, as converting before the sunset may allow you to pay taxes at a lower rate. With the potential for higher tax rates in the future, a Roth conversion can be a smart move to lock in tax-free growth and withdrawals.
Married couples filing a joint return:
Key Considerations
- Timing: Consider converting before the end of 2025 to take advantage of lower tax rates. Spreading the conversion over several years can help avoid pushing yourself into a higher tax bracket.
- Tax Diversification: Having both traditional and Roth accounts provides flexibility in managing your tax liability in retirement.
- Adapt: The tax environment is an ever shifting one and an effective financial plan anticipates potential shifts in tax rates and policy.
Conclusion
The sunset of the TCJA adds a layer of urgency to the decision of whether to pursue a Roth conversion. By acting before the end of 2025, you may be able to capitalize on lower tax rates, setting the stage for a more tax-efficient retirement. If you’re unsure how Roth conversions fit into your investment and tax strategy, reach out to learn more.
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