It’s always hard to do tax planning, but election years pose especially big challenges.
Depending on which party wins control of the White House, the Senate, and the House of Representatives in November, the ramifications for your taxes could be huge.
It’s therefore imperative to watch the election with your tax situation in mind. Once the results are in, you should be prepared to take prompt action in three areas that could see dramatic shifts no matter who emerges victorious.
Ever since the most recent set of tax rate reductions took effect during the 2018 tax year, Roth conversions have been favorable. Many retirement savers have much of their nest eggs set aside in traditional IRAs and 401(k) accounts, and they’ll have to pay taxes when they make withdrawals from those accounts in retirement. By then, it’s entirely possible that the income tax rates you’ll have to pay will be much higher. With the ability to lock in today’s tax rates of 10%, 12%, 22%, or 24% on taxable incomes up to $326,600 for joint filers in 2020, you have an opportunity to pay relative low taxes now on a in exchange for tax-free growth for the rest of your life in a Roth IRA.
If President Trump wins the election, then Americans can expect those rates to last through 2024. That’d make it easier to adopt a gradual conversion approach, doing partial conversions each year to keep your current taxable income low but still nail down tax-free future growth. However, if former Vice President Biden wins the election and Democrats make gains in Congress, it could threaten those low tax rates. In that case, front-ending more of a Roth conversion during 2020 would eliminate the risk of a tax hike in 2021 making the strategy less attractive.