Elections and Taxes and Roth Conversions.
It’s almost Election Day in the US once again.
While the outcome may be uncertain, one thing we can count on is that plenty of opinions and predictions have been floated. In financial circles, these predictions will inevitably include discussion of the potential impact on markets. The last two presidential cycles have seen some of the most volatile markets in recent memory – like the quickest bear market in history (2020) and the worst year ever for the bond market (2022).
Even in light of the short term chaos we’ve endured, one thing has remained steadfast: an investor focused on the long term has had a great run regardless of who’s in power.
Here’s nearly a 100 years of the US Stock Market to help reinforce that:
Source: Dimensional.
When politics start to dominate our phone screens, televisions, discussions with friends, etc. it can seem like it’s inevitable that they’d influence our financial condition. While there certainly are some areas where policy impacts us (more on this below), I like to revisit a few things I believe are true about stocks:
Companies are most often managed and operated by people with a tremendous amount of skin in the game. These incentives keep them looking for ways to quickly adapt to whatever regulatory, tax, or economic climate we find ourselves in.
Known risks are priced into the stock market today. For example, as the likelihood of a regime change increases, it affects the demand of stocks which may be impacted by that regime change and their outlook on taxes, stimulus, and regulation.
Unknown risks are what can actually derail our financial plans. But, as the name suggests, they’re unknown and can’t be predicted with any certainty. This kind of guessing isn’t usually productive to a portfolio management strategy.
Lastly, if you don’t have more than 4 years to keep your funds invested, then you probably shouldn’t be in stocks in the first place.
While I don’t believe it’s a good idea to drastically alter an investment strategy as a result of elections, there is one area where the outcome can have meaningful possible repercussions: your personal taxes.
In fact, just this week, the IRS provided it’s updated tax brackets for 2025. Here’s how they compare to the 2024 levels:
Source: IRS.
Source: IRS.
As you can see, the 2024 and 2025 tax brackets look quite similar, so these updates aren’t particularly consequential for most people.
What is consequential, however, is what could happen in 2026.
As a hypothetical example, a married couple filing jointly with a $150,000 income pays a top federal income tax rate of 22% in 2024. Unless we see new legislation passed, the top tax rate on this same couple will jump to 28% in 2026 (upon the sunset of the TCJA legislation which President Trump signed into law during his first term). A couple earning $250,000 would see a jump from 24% to 33% (!).
Here is the full comparison between today’s rates and the 2026 expected rate:
Source: IRS. For educational purposes only. Not to be considered tax or investment advice. Subject to change.
Source: IRS. For educational purposes only. Not to be considered tax or investment advice. Subject to change.
As you can see, these differences in tax rates relative to income are pretty drastic.
Now let’s notice the commentary related to Roth IRA Conversions we’ve added to the right side of each image above — This is what we are looking to discuss with clients over the next 2 months.
Specifically, we want to ask this question:
"If you have assets in a pre-tax IRA (a traditional IRA, rollover IRA, SEP IRA, etc.), should we elect to convert a portion of those assets into your Roth IRA, claim that amount as income in 2024 at today’s tax rates, and remove the potential for those assets to be taxed at a higher rate in the future?
A new law could pass, but if nothing happens we could see tax increases as soon as 2 years from now (and if you haven’t noticed, congress can be pretty good at doing nothing).
And while there is no one-size-fits-all approach to Roth IRA conversions, it’s worth modeling out scenarios to see what it could look like.
So, let’s model it out…
For clients, here is a direct link to our calendars for a Tax Strategy Discussion:
To meet with Adam Harding, click here.
To meet with David Young, click here.
If you’re not a client but would like to chat about this (or anything else), click here.
That’s all for today.
Onward,
Adam Harding
Advisor | CFP | Dad
www.hardingwealth.com
*For educational purposes only. Consult your advisors and tax professionals before implementing a strategy.
