Trump Tax Cuts Expiring: Your Retirement Savings Are Under Attack
Summary
➡ Right now, people with high incomes might face higher taxes, so financial planners are slowly moving their money from regular 401Ks to Roth 401Ks or Roth IRAs. This means you pay taxes now, but later you can take out your profits tax-free. It’s important to get professional help for this because it can have big tax effects. Doing this slowly over time could save you a lot of money in the future.
Transcript
That’s why we’ve got our man on the scene, Dave, gone, the editor of the five bullets here. Dave, you’ve been on this story. Get everyone caught up. What is happening recently with the tax advantages possibly going away from a should people know? Well, I think the best place to start this story is with the fact that the Tax cuts and Jobs act of 2017, also known as the Trump tax cuts, that’s all set to expire at the end of next year.
That’s a function of the weird budgetary math that goes on in Washington, DC, where you have to make everything pencil out over a decade long time horizon. And back in 2017, the way they made it all pencil out over a ten year time horizon was to have the tax gust just up and expire at the end of 2025. Now, I’m going to stick my head out here for a little bit and say I don’t think for most people these tax cuts are going to expire at the end of 2025.
And the reason is, if they expire, everybody’s tax rate is going to go up. Literally everyone will have a higher tax rate if these tax cuts are allowed to expire. So, for instance, if you’re in the 22% bracket right now, right now, this year, that’s a couple who makes approximately between 100 200,000 taxable income this year. You would then end up in the 25% tax bracket once the tax cuts are allowed to expire.
Now, I can predict that for most people, unless you’re at the top end of the income scale, probably you won’t have a tax increase on that level. And that doesn’t matter who wins the White House this year, it doesn’t matter who has control of Congress. Nobody on either side of the aisle is going to want to own a tax increase like that. So we have precedent for this, too.
By the way, the tax cuts under Bush 43, those were set to expire at the end of 2012. And there was a last minute deal between Barack Obama and the Republicans in Congress. They came to terms, and most of the Bush tax cuts were made permanent, except at the very top end of the income scale. I think we’re probably going to end up with something like that. Again, it may well be a very last minute deal with the new president, new Congress, however that shakes out.
But again, nobody on either side of the aisle is going to want to own a tax increase where even people who are paying 10% right now would get bumped up to a 12% rate. So that leaves people in Washington with kind of a problem, like, there’s all this revenue that they were expecting to come in starting in calendar year 2026, and it’s not going to be coming in now.
Where are they going to revenue? And that is, I think, the reason why we are starting to see these proposals coming in for, oh, let’s wipe out the tax advantages of a 401. Now, this is not a new idea. This is something I’ve been on the case going back. First I’ve encountered it being floated was during the 2008 financial crisis. You had Democrats in Congress at that time saying, hey, maybe we should restrict the tax advantages for upper income folks.
That didn’t go anywhere. But every so often, every few years, you see the idea surfacing again. So it has surfaced very recently in a report from the center for Retirement Research from Boston College. The report was prepared by Alicia Minell, who works at Boston College in conjunction with somebody named Andrew Biggs, who worked for the Bush administration and who now is at the American Enterprise Institute. So the idea was to get a proposal that both liberals and conservatives could get behind, and the details are extremely fuzzy.
But the gist of it is that, yes, the tax benefits that millions and millions of Americans enjoy with a 401k should be pretty well done away with, because Uncle Sam needs more revenue, whether it’s for short Social Security or for any other purpose. That’s the raw deal, so to speak, that’s being put forth right now. Okay, so then if nothing happened or if this goes through, right, everyone would feel a tax increase.
You had said it most likely, yeah, if they expire. So you had said if this might not happen for most people, like low income, middle income, but what about high income? Could they attack high income and say, hey, anyone that’s middle, high class, could their 401 tax benefits go away? Anything on the books? There are any dates that people would need to worry about other than further down the road of the main expiration of those tax cuts? I think the date to keep your eye on is the end of 2025.
I mean, if you think this is going to make a difference in the election, you’re going to want to pay attention to what people are saying on the campaign trail this year. I think for anybody at the upper end of the income scale, particularly given Joe Biden’s rhetoric going back several years now, about over $400,000 a year. Yes, you would want to be particularly wary because your tax rates might well be going up, because what happened in 2012 was that the Bush tax cuts were made permanent for everybody, except I think it was individuals over 400 and couples over 450.
And they went back to Clinton era tax rates with a top rate of 39 six. I guess the other thing for everyone that’s watching at paradigm press, we’re always trying to keep our eyes on where the puck is going. And we know that the government, I know, I’d say it bluntly, they’re coming for our money. It just depends where it is, because it’s different things. Right? Like what? Mortgage write offs.
A lot of these taxes just kind of go away. And it was something that middle class families could count on. And this is just another one that could be coming down the road. And I don’t think they’re going to stop. Right. They’re trying to claw more and more money towards, I mean, they’re running huge deficits, spending a lot of money, printing a lot of money, but they’re still coming after pretty heavy duty increase in taxes or letting tax cuts expire.
Anything else people should worry about? I mean, 401 ks are one obvious spot where there’s a money grab there. Anything that they do to lower their tax burden, I think they need to jealously guard that as best they can and pay close attention to what the politicos say, either out loud or under their breath this year. And you’re absolutely right about how everything keeps getting shaved back and shaved back and shaved back over time.
And this goes back to the big Reagan tax cut of 1986. Yes, the top rates went down, but a whole lot of deductions went away at that time. Some people watching this can remember a time when you could write off credit card interest on your taxes. That went away in 1986. Yeah. And so all of this has been done away with very steadily, bits and pieces so that most people wouldn’t necessarily notice at the time.
And that came in force with the trump tax cuts. Folks who live in high tax states like Maryland, where you are and where paradigm’s headquarters is, they have limits on what they can deduct for state and local taxes. And that’s going to be extremely interesting to see the debate as it unfolds in 2025 as to how that is going to be resolved. You do see proposals every so often, even within the last couple of years.
Oh, let’s tweak the salt deduction. Salt deduction as it’s called. It hasn’t gone anywhere, but it’s out there and it’s definitely going to be rearing its head again once we get beyond this year’s election. The reason we’re covering stuff right now and the reason the report that we saw is important is because if something like this is going to happen, you want to be ahead of it and you probably want to be months or years ahead of it.
If we’re talking about your family’s wealth, there would be strategies that if these tax, if it’s expiring, you’re going to want to be ahead of this stuff and know where to put your money and potentially where to keep it safe and away from these things. Because if you can’t do normal 401k, you’re going to have to find something else. So we’ll keep you aware of that. And if we see anything else on the horizon, because Dave’s our man on the scene, we’re finding all kinds of things that are.
Most folks in the mainstream aren’t talking about these things, but they’re coming. And in an election year like right now, it’s more important than ever. And we got to keep an eye on the government coming for our money. Dave, I’ll give you the last word. Anything else anyone needs to know? Well, as far as 401 ks goes, let’s bring it back to the topic at hand here. Particularly for people at the top end of the income scale, they are going to be facing higher taxes.
And what a lot of financial planners are doing now is they’re getting people into Roth conversions. They’re taking people’s 401K balances. They’re moving it slowly, very incrementally, very carefully into Roth 401 ks or Roth iras, where you pay the taxes up front, but then all of your gains you can take out tax free. Don’t try this alone. Get professional help for something like this. If this is something that you think you need to do, because that’s not really our expertise.
I will say, dave, I didn’t know where we were going to go with this conversation. Now I will say, one, I’m not an expert, but I will say I have done that personally. And when you get to the tax guy at the end of the year, he’s like, did you mean to do this? And I was like, yeah, I meant to do it. Now what I did. And again, this is I can look back in retrospect and it was a good idea.
But what I did is I did the conversion in August of 2022 because my 401k had a pretty decent drawdown. Because 2022 was a rough year for stocks, I saw drawdown, my balance was lower. When you convert at a lower balance, you pay less taxes. And then luckily only in retrospect can you say that was a good time to have done it. But what Dave said is absolutely true.
If you’re going to do something like that, incrementally move from a traditional 401K into a Roth, get a professional. There are big time tax implications and you want to make sure you’re doing the right thing. But that’s the kind of thing that takes a good amount of time. And if we see something coming in a year or two from now, that might be very well worth it and might save you a lot of money.
Dave, thanks for getting everybody aware of this, and we’ll ping you or ping us as well if you see anything else happening there. And for everyone at home, thanks for tuning in to paradigm Press’s YouTube channel. Give us a like below. We’ll keep publishing this type of material, the story the mainstream’s not telling otherwise. We’ll see you soon. Thanks Dave. Thank you. .
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