Roth Conversions as a Tax-Efficient Strategy

As retirees approach the age of 73 (or 75, depending on their birth year) when Required Minimum Distributions (RMDs) begin, many miss out on the opportunity to optimize their tax situation. In the years leading to RMDs, and depending on your situation, Roth conversions can offer retirees a means of reducing future taxable income. This allows you the flexibility to manage tax brackets and potentially leave more to heirs, in a tax-efficient manner.

There is no rule of thumb that works for everyone, so we must look at multiple variables such as tax brackets, Social Security, retirement income, and the desire to pass funds on to your beneficiaries. Roth conversions aren’t ideal for every investor, but for the right candidates, they can be an effective way to reduce future tax liability, provide tax-free growth, and eliminate or reduce RMDs while enhancing estate planning. While conversions can be made anytime, during early retirement is typically the sweet spot for many.

With a ballooning Federal budget, we believe we could experience some of the lowest tax brackets of our lifetime. Moreover, the Tax Cuts and Jobs Act (TCJA) of 2017 is set to expire at the end of 2025, meaning tax provisions will revert back to pre-TCJA levels unless Congress extends them.

Key Effects of the 2025 TCJA Sunset on Tax Brackets

If the TCJA provisions expire as scheduled:

1. Tax Rates Will Increase – The current seven tax brackets (10%, 12%, 22%, 24%, 32%, 35%, and 37%) will revert to the higher pre-TCJA rates (10%, 15%, 25%, 28%, 33%, 35%, and 39.6%).
2. Standard Deduction Will Decrease – The standard deduction, which was nearly doubled under the TCJA, will drop back to pre-2018 levels (adjusted for inflation).
3. Personal Exemptions Will Return – The TCJA eliminated personal exemptions, but they may return.
4. Child Tax Credit Reduction – The expanded child tax credit will likely shrink, making it less beneficial for families.
5. State and Local Tax (SALT) Deduction Cap May Be Removed – The TCJA limited the SALT deduction to $10,000; this cap may be lifted.
6. Estate Tax Exemption Will Be Lowered – The estate tax exemption, which was dramatically increased, will drop back to lower pre-TCJA levels.

What This Means for Taxpayers

• Middle-income earners may see higher tax rates, lower deductions, and reduced tax credits.
• Higher-income individuals may face a return to the 39.6% top tax rate and a lower estate tax exemption.
• Families with children may receive less in tax credits.