TCJA set to expire: Tax moves to consider if you're nearing or in retirement

As you've been saving for retirement with a 401(k), IRA or other tax-advantaged account over the last several years, you've likely been relying on existing widened tax brackets, tax rates, deductions and exemptions for the basis of your future planning.

But since 2018, these areas have all been affected by taxpayer-friendly adjustments made by the Tax Cuts and Jobs Act (TCJA). The tax relief created by the act, however, always was planned to be temporary, and it's on track to expire at the end of 2025.

That means that unless Congress takes action, significant tax law changes are on the horizon. Before they take effect is the best time to find out what the implications might be for your retirement income strategy and decide what you can do to preserve your money's tax efficiency.

In this article, we'll cover:

• What taxes did the TCJA change?
• How the TCJA sunset affects retirees and RMDs
• How it affects your heirs
• Tax moves to take now

The TCJA ushered in sweeping federal tax code changes, and most of them are scheduled to expire on Dec. 31, 2025. Here are the key topic areas that taxpayers need to pay attention to:

The TCJA lowered marginal rates for most individual tax brackets. Those rates took effect in 2018 and will remain in place through 2025. After that, marginal rates are due to revert to their previous levels.

The TCJA nearly doubled the standard deduction from $6,350 for a single taxpayer in 2017 to $12,000 in 2018. Now at $14,600 for 2024, the standard deduction is slated to return to pre-TCJA levels (adjusted for inflation) in 2026.

The TCJA also changed personal exemptions, child tax credits, and deductions such as SALT, mortgage and home equity, and charitable contributions.

The TCJA also more than doubled the federal individual lifetime estate and gift tax exemption over the years, bringing the limit from $5.49 million in 2017 up to $13.61 million in 2024. After the TCJA expires, the exemption is expected to drop to approximately $7 million. That means more Americans will suddenly find themselves qualifying to have to pay estate and gift taxes that they may not have been counting on. Be sure to keep other estate expenses and state taxes in mind as to how they may impact your situation.

Once the TCJA expires, marginal tax rates will rise for most tax brackets. Many people will have to pay higher taxes on their retirement account distributions.

This can have an outsized effect on retirees when you consider that many tax-deferred savings vehicles, such as 401(k) and traditional IRA accounts, have required minimum distributions (RMDs). These are the mandated withdrawals you must start taking when you reach a certain age (between ages 72 and 75, depending on when you were born). For retirees who are taking only minimum distributions, keep in mind their retirement assets may continue to grow, resulting in potentially increased RMDs.

If you have money in a retirement account that has RMDs, simply stopping withdrawals after the TCJA sunsets in 2025 to avoid higher taxation isn't an option (not without incurring a financial penalty, anyway). So you should start anticipating this effect on your retirement withdrawal strategy and adjusting it now.

Do your legacy plans include leaving an IRA to your child or grandchild? The post-TCJA tax rate hikes could have multigenerational ripple effects in the form of higher tax bills on distributions your beneficiary takes from that IRA after 2025.

Compounding these potential concerns are the rules recently established by the SECURE Act of 2019 and the SECURE 2.0 Act of 2022. In the past, your beneficiary could have spread distributions from their inherited IRA throughout their lifetime. Now, many non-spouse beneficiaries must withdraw the full balance of an inherited IRA within 10 years of the original account owner's death. In addition, if you begin taking RMDs from your IRA and then pass it down, your beneficiary may have to start taking RMDs as soon as they take ownership of the account. Keep in mind, this additional income will be paid on top of earnings and wages they already are receiving, and depending on timing, could arrive during peak earning years.

Those annual RMDs—and other distributions taken over the span of a decade—all will be subject to income taxes starting in 2026 at rates that are higher than they are today. So your beneficiaries might be forced to cash out their inheritance more quickly than you planned and contend with a tax burden you didn't anticipate.

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Leave a tax-efficient legacy

The TCJA sunset's repercussions for your retirement and wealth transfer plans may depend on how your financial accounts are structured. If you have a good grasp on how your accounts are taxed, you'll be better equipped to consider the best ways to maneuver your money in the most tax-efficient ways.

In general, retirement savings and investment accounts fall within three categories: taxable, tax-deferred and tax-free. These also are described as "tax now," "tax later" and "tax never."

• Tax now. You've already paid income taxes on the money you contribute to tax now accounts. You also pay taxes on gains as they accumulate. Some examples are checking and savings accounts, mutual funds and certificates of deposit.

• Tax later. With tax later accounts, income taxes aren't due on earnings until you take distributions. Examples include 401(k), 403(b) and traditional IRA accounts (funded with pre-tax dollars) and fixed and variable annuities (funded with after-tax dollars).

• Tax never. After funding a tax never account with after-tax dollars, subsequent earnings and distributions usually aren't ever subject to federal income taxes. Examples of this type are Roth IRAs, municipal bonds and cash-value life insurance.

Given how rising tax rates and RMDs could affect your tax later accounts soon, you may want to assess the assets you have now and consider making some moves—with an eye toward tax never solutions.

If you convert a 401(k), 403(b) or traditional IRA to a Roth IRA by the end of 2025, you'll pay income taxes on the full amount at current, TCJA-era rates. From that point on, all future earnings and distributions will be tax-free—for you and your beneficiaries. In addition, Roth IRAs have no RMDs. So, you'll have the flexibility to take withdrawals as needed—or leave the entire balance to your beneficiaries, who can hang onto it for as long as they wish.

The primary purpose of life insurance is to protect and support your loved ones. But some policies also can help you—and your heirs—reduce tax liability and may provide additional leverage. Many life insurance contracts contain cash value and are tax-never accounts. You can access cash value while you're living and potentially leave more to beneficiaries who won't likely owe income taxes on any death benefit payouts they receive.¹

If generosity is part of your long-term financial plan, you might consider giving some gifts sooner rather than later. The TCJA substantially increased the lifetime estate and gift tax exemption. It's up to $13.61 million in 2024. After the act sunsets, the exemption is set to drop by about half. So, it might make sense to pass some wealth to the next generation while the TCJA remains in effect, rather than hold off and save it all for your estate.

Through 2025, you can deduct charitable gifts up to 60% of your AGI. That ceiling drops to 50% once the TCJA expires. So if you intend to make some large gifts in the coming years, you may want to front-load your giving to maximize your tax benefits. You may be able to lower your taxable income by implementing qualified charitable distributions (QCDs), beginning at age 70½.

The end of 2025 will mark the TCJA's sunset and the closing of a window of opportunity.

If you're in or near retirement, it makes sense to explore how you might benefit from soon-to-expire deduction allowances, exemption rules, bracket changes and tax rates. Then, when you also account for recently enacted rules governing RMDs, you may have reasons to shift some assets from tax later to tax never accounts.

As you weigh all your options, consider connecting with a Thrivent financial advisor. They can help you fully understand each decision's financial implications for you and for your beneficiaries.