Ed Slott: What Investors Need to Do Before the Tax Cuts and Jobs Act Expires

Christine Benz: We wanted to take a look forward into the year ahead and get your take on 2024 taxwise. What should people have on their radar? Are there any major changes going into effect this year?

Ed Slott: Well, now we’re just one year less away from when the Tax Cuts and Jobs Act tax cuts will expire. So, now you only have two years to get things done. I remember in ‘23, I was talking about you had three years left. Well, now you only have two years left, ‘24 and ‘25. And rates are going to remain low, tax rates—and that’s the key, get money out, especially out of IRAs when tax rates are low. You’ll have this year and next year, and who knows what’s going to happen after that. I guess it depends on who is in office, what kind of Congress we have. But I’d say you have to start speeding up your plans to start whittling down, especially if you have a large IRA with Roth conversions, and start making plans and get a lot of that money out, even if you don’t have to, maybe you’re not subject to RMDs yet, but maybe it pays to start getting that money out earlier. Or otherwise, you could have a big problem years later.

2026 Tax Changes

Benz: Let’s discuss what is poised to change in 2026 barring congressional action. So, there will be higher income tax rates in effect. And maybe you can talk us through the connection with Roth conversions, why that would be advantageous to get ahead of that in advance of the sunsetting of those TCJA provisions.

Slott: Right, because you always want to get money out. Remember this money, when I’m talking about money, I’m talking about IRA money. This is money that will be taxed. It’s only tax-deferred, not tax-free, which means at some point it’s going to be taxed. It’s not if, but when. This money will be taxed. So, if you can make plans now to get it out while rates are low, you want to—like anything—you go to a store, you want things on sale. Taxes are on sale. The only thing different is: The thing in the store, you don’t actually have to buy, but the taxes, you do. There’s no choice there. So, you know this money has to be paid out anyway. Try not to be shortsighted and think “I’m saving money.” You’re not saving money because if it costs more later, overall, you could be left with less later. Plus, think beyond yourself to your beneficiaries that have this short window, only 10 years after death. Remember that came from the Secure Act, which means, the less you take, the more will be pushed into a shorter time period, and overall, the family will lose more money when more of it has to come out in a shorter time period.

So, Roth conversions, you have two years to look at these things, and I would have serious conversations with your advisors or look at yourselves, your own tax brackets for ‘24 or ‘25, and see if there’s room to at least move some of your IRA money to Roth, because if you don’t, the IRA balance is just going to grow, and it could be subject to much higher tax rates later on.

Accelerating IRA Withdrawals

Benz: How about accelerating IRA withdrawals? It seems like a lot of retirees have internalized this mindset of trying to defer their withdrawals as long as possible.

Slott: If you’re going to take the money out of the IRA, may as well convert it to the Roth. That’s what I’m talking about if you’re taking it out anyway. So, that’s what I’m talking about—voluntarily taking out before you even have to, and that’s the best time to do Roth conversions. This assumes you don’t need the money, so of course, you want to put it in a tax-free account. Remember with Roth conversions, it grows income-tax-free for the rest of your life and 10 years beyond to your beneficiaries, plus during your life, there’s no RMDs. And another change for 2024—if you have money in a Roth 401(k)—now, before 2024, you would have been subject to RMDs. Even though Roth IRAs were not subject to RMDs during your lifetime, Roth 401(k)s were. But Congress changed that. Starting in 2024, if you have a Roth 401(k), there are no RMDs from that Roth 401(k). So, that’s a good change.