Why We Shifted to Tax-Free Growth in Q4 2025

The Situation

It is Q4 2025. The Tax Cuts and Jobs Act (TCJA) sunset provisions are set to expire December 31, 2025. This means tax rates could rise significantly in 2026. Current brackets at 22%, 24%, 32%, and 35% could jump to pre-2018 levels of 25%, 28%, 33%, and 39.6%. For high-income earners, this is not theoretical. It is imminent.

How Hyde Legacy Group Approaches This

This situation is tailor-made for proactive tax planning. The opportunity is time-limited and high-stakes.

• Immediate Action on Rate Changes: The goal is to lock in conversion rates while they are low, before rates spike. A client converting at 24% in 2025 versus 35% in 2026 saves 11 percentage points on every dollar converted. On a $500,000 conversion, that is $55,000 in tax savings.
• Evaluate the Trade-Off: The alternative to converting now is waiting and hoping Congress extends the lower rates. But waiting costs certainty. Converting now locks in known rates. Waiting locks in unknown risk.
• Consistent Return Assumptions: We still assume 7% returns, 3% inflation. Tax law changes do not affect return assumptions. But they do affect tax efficiency and the timing of conversions.

The Numbers

A client with $1.5M in a traditional IRA needs income in retirement. Under current law, a $100,000 Roth conversion might cost $22,000 in federal taxes at the 22% bracket. Under post-TCJA rates, that same conversion could cost $35,000. The difference is $13,000 per $100,000 converted. Over a lifetime of conversions, the math is staggering.

If our client converts $200,000 in 2025 at 24%, the tax cost is $48,000. If they wait and convert the same amount in 2026 at 35%, the cost is $70,000. By acting now, they save $22,000 on this single strategy.

Key Strategies Applied

• Front-Load Roth Conversions in 2025: Execute larger-than-usual conversions this year while rates are still known to be lower.
• Shift Assets to Tax-Free Growth: Once converted to Roth, the assets grow tax-free forever. In a market where returns might be 7% annually, the tax efficiency of that growth compounds dramatically over 30 years.
• Coordinate with Tax Professional: Large conversions require planning to avoid pushing the client into an unexpected bracket or triggering net investment income tax (NIIT).
• Document the Strategy: Clear documentation of the conversion strategy ensures it stands up to scrutiny if tax law changes or questions arise later.

Why This Approach

Tax planning is usually reactive (April rolls around, you file). This is proactive. We are acting ahead of a known legislative deadline. The cost of action now (convert at 24%) is lower than the risk of inaction later (convert at 35%). Waiting locks in uncertainty.

What This Does Not Mean

This does not mean converting blindly. Conversions have consequences. They create tax liability, which must be paid from somewhere (preferably outside the IRA, not from the IRA itself). They might trigger higher Medicare premiums for certain income levels. They must be coordinated with income from other sources. Rash conversions without planning can backfire.

This also does not mean Congress will definitely let the rates expire. But the prudent course is to act as if it will, then be pleasantly surprised if it does not.

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