4 Roth Strategies to Utilize Before the Tax Cuts and Jobs Act Sunsets in 2025
By: Scott Downing, CFP® Sr. Financial Advisor
With the Tax Cuts and Jobs Act (TCJA) set to expire at the end of 2025, tax rates are expected to increase as they revert to pre-2018 levels. This shift presents a critical planning window for Roth strategies, as individuals can take advantage of the current lower tax rates.
Here are four key Roth strategies to consider before the TCJA sunsets:
1. Roth Conversions During Lower Tax Rates. The TCJA lowered individual income tax rates across most brackets. Converting funds from a traditional IRA or 401(k) to a Roth IRA now allows you to pay taxes at today’s lower rates, locking in tax-free growth and withdrawals in retirement.
- Why Convert Now: Post-2025, tax rates are likely to increase, meaning future conversions could be taxed at higher rates. Converting now allows you to lock in lower taxes.
- Partial Conversions: Spread out conversions over the next year to avoid pushing yourself into a higher tax bracket in any one year. This allows for tax-efficient Roth conversions while taking advantage of the lower rates.
2. Maximize Roth 401(k) Contributions. For those still working, contributing to a Roth 401(k) can be a smart strategy under the TCJA. Roth 401(k) contributions are made with after-tax dollars, but withdrawals in retirement are tax-free. By maximizing contributions now, you benefit from tax-free income later, potentially at a time when tax rates could be higher.
3. Backdoor Roth IRA. High-income earners who exceed Roth IRA contribution limits can take advantage of the backdoor Roth IRA strategy. This involves contributing to a non-deductible traditional IRA and then converting those funds to a Roth IRA. The TCJA’s lower tax environment makes this strategy even more appealing before the law sunsets.
4. Take Advantage of Tax Bracket Management. While tax rates are still low, manage your taxable income carefully. If you're nearing retirement, consider withdrawing from taxable accounts or doing Roth conversions up to the top of your current tax bracket. This allows you to optimize your tax liability while building up your tax-free Roth accounts.
Also consider reviewing your tax deductions to offset any income that you might realize when utilizing these Roth strategies. Bunching charitable gifts in a Donor Advised Fund or planning for Qualified Charitable Distributions from taxable IRAs beyond age 70.5 are helpful strategies when employed properly.
Conclusion
With tax rates expected to rise in 2026 and beyond, now is the time to consider Roth strategies that take advantage of the current lower rates. By converting traditional accounts, maximizing Roth contributions, and strategically managing tax brackets, you can position yourself for greater tax-free growth and income in retirement. Please reach out with any questions on these or other tax planning topics.
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