Things are busy here this Thanksgiving week and I’m sure the same is true for you. Lots going on and lots to think about. Still, I often quip that, “all my problems are good problems”, and it’s true; family, friends, clients, projects, hopes and dreams, etc, all vying for time. But who can complain about that? I’d rather have too much than not enough and I’m thankful for all I have, all we have, and for a future full of possibility.

On that note I want to wish you and yours a happy Thanksgiving. I hope you can enjoy the opportunity to be with family and friends this week.

- Brandon

Good morning. There’s news on this Veterans Day that the government shutdown could be coming to an end. Let’s be hopeful because, among other reasons, as of last week we’ve blown past the record for the longest shutdown in our history. This holiday reminds us that we helped end WWI, so we ought to be able to run a government. Besides that, the day also calls us to remember those who served in the armed forces. Thank you for your service. 

On to this week's post... anxiety has been growing in some circles about how extended the stock market is getting and when, not if, the AI bubble fueling it will pop. Granted, there has been a huge amount of spending in this space and plenty more is planned, but is this a bubble like we saw back in the late 90s? While it’s easy these days to latch onto narratives that clearly guide us one way or the other, the reality is always more complicated.

I was initially going to add multiple layers of information to what I’m posting below showing an overall healthy economic backdrop for the AI boom, but my post was getting too long. I may include some of the other information next week. So today I’m sharing portions of a recent piece from JPMorgan that downplays comparisons to the Dot-com bubble. There are important differences, of course, but it’s important to remember that these things never play out in exactly the same way. The point is to keep paying attention.

I generally agree with the opinions below but, among other things, all of this speaks to the importance of diversification when managing a portfolio for the long run. Spread your investment money around prudently, monitor, rebalance/take profits, repeat. Artificial intelligence may well end up reinventing our economy the way the Internet did, but your financial future shouldn’t wholly depend on it.

From JPMorgan…

… the Magnificent 7 [Apple, Microsoft, Google, Amazon, Nvidia, Meta, Tesla] is looking less like a cohesive monolith, with more dispersion emerging underneath the surface in profits and performance. It is also giving way to a broader AI ecosystem.

Although massive investment in AI echoes the dot com bubble, this time, demand is real, financing is high quality and leverage-lite and circularity is strategic. 

As prices hit all-time highs, and announcements about more capex, billion-dollar investment deals and debt issuance fly around, investors are growing concerned we’re in a bubble. 

Railroads, electricity, landlines, cars, plastic, shale, internet. AI might be new, but innovations that spur capital investment cycles are not. Profits and productivity have always materialized eventually, but some of the time, though not all the time, markets have gotten ahead of themselves. It’s still early days for AI, but we’re not seeing too many signs of excessive exuberance.

In previous technological transformations, first movers haven’t always reaped the benefits. WorldCom, Global Crossing, and Level 3 built the internet we still use today, but two of the three went bankrupt. They grew investments faster than demand, prices collapsed, and a decade later, companies like Amazon and Google swooped in and built trillion-dollar businesses on that glut of free bandwidth. But today’s hyperscalers [big cloud service providers that operate massive data centers] aren’t just building the compute AI needs to run. They also own and operate the network, architect the software layers on top and control the distribution. The AI transition is different in a few critical ways: 

Profits are keeping pace with enthusiasm. Since the launch of ChatGPT, the info tech sector has risen 158%, supported by soaring profit growth. In contrast, returns became untethered from earnings growth during the dot com bubble. This doesn’t preclude a future AI bubble, but for now, price and earnings look reasonably aligned. 

Demand precedes – not succeeds – investment. The hyperscalers have already invested close to $600bn in AI, and the bill keeps on getting bigger. After 3Q25 earnings reports, consensus estimates for 2026 and 2027 capex [capital expenditures] have increased by $47bn and $61bn, respectively. But it’s still not enough to meet existing demand. This earnings season, cloud providers reported an aggregate $1,202bn in backlog. Google has “signed more deals over $1billion through Q3 this year than…in the previous two years combined,” and Amazon’s CEO highlighted, “AWS is growing at a pace we haven’t seen since 2022.” While Meta’s stock sold off after it raised both 2025 and 2026 capex guidance, CEO Mark Zuckerberg doesn’t think it will go to waste: “I think that it's the right strategy to aggressively frontload building capacity…That way, if superintelligence arrives sooner, we will be ideally positioned for a generational paradigm shift...If it takes longer, then we'll use the extra compute to accelerate our core business which continues to be able to profitably use much more compute than we've been able to throw at it.”

Financing is mostly cash – not debt. Hyperscalers are investing massive amounts into AI, but they generate massive amounts of cash each quarter too. Free cash flow is down from its 2024 peak of $238bn but still strong at $188bn, and growth is projected to inflect in 2026. Some of these companies have also started to tap both public and private debt markets to fund data centers. In and of itself, this isn’t a bad thing, as debt is part of an optimal capital structure, but it’s a risk worth watching, especially as less profitable companies lever up. 

Strategic circularity. The hyperscalers spend 18% of their cost of goods sold on NVIDIA and represent 42% of NVIDIA’s revenue. Add to that multi-billion-dollar deals announced between chip makers, hyperscalers and LLM developers, and investors are growing rightfully concerned about who’s footing the bill. Some have even compared it to telecom carriers’ buying up each other’s excess fiber cable capacity during the internet bubble. However, today’s AI deals are strategic investments tied to real demand, built on exponential revenue growth. Rather than circularity, these deals represent competition, as leading LLM developers secure compute from multiple cloud providers, who have deals with other LLMs. 

Still, investors shouldn’t get complacent. Power and GPU supply could constrain growth to below expectations, though this could help prevent excess supply. Adoption appears to be rapid, but sticky revenues from paid subscribers with enterprise-driven use cases are not guaranteed. Faster chip obsolescence could also change the economics. Even a 1-year haircut on the useful life of AI infrastructure could be a 3% hit to earnings. And although circularity may be an essential foundation of investment today, one damaged link could have an outsized impact.

We might not be in another internet bubble, but today’s megacap tech giants aren’t destined for eternal domination either. They’re competing against each other, and disruptors will inevitably emerge. With valuations this high, and investments this astronomical, there isn’t much room for error.

Here’s a link to JPMorgan’s full article if you’re interested…

https://am.jpmorgan.com

Have questions? Ask us. We can help.

There are a variety of things percolating this morning. I’ll share some below, although there’s no clear throughline.

The Federal Reserve meets again this week for another decision on its short-term interest rate benchmark. As I type there’s a 99% chance of a quarter-point rate reduction. Then there’s a 94% chance of another quarter-point reduction at the Fed’s last 2025 meeting in December. Odds of further reductions even out quickly into the new year, but three rate reductions (including September’s) would be a large puff of wind into the economy’s sails.

The stock market is currently pricing those changes in. That, plus giddiness from softening rhetoric related to trade negotiations with China is helping lift major indexes to new highs. Eventual confirmation of these factors should keep investors happy but any contrary whiff will create volatility. Remember that the fourth quarter is usually the best quarter for stocks all year, but it also tends to be one of the most volatile.

Should You or Shouldn’t You when it comes to doing a Roth conversion? Our individual goals and tax situations are unique but there’s enough common ground to develop a short-hand for whether you should consider converting money from a traditional retirement account into a Roth. Here are a few questions to ask, in order of priority. Answering yes to one means you should consider a conversion and more yesses mean the obvious.

Look at your 2024 tax return. Were you in the 22% or lower Federal tax bracket?

Is your income roughly the same this year?

Or will your income be lower? Maybe you’ll show a large loss or you’re expecting more deductions?

Are you anticipating, for whatever reason, that your tax rate will be higher in the future?

When it comes to Roth conversions, we’re looking for calendar years when your taxable income is lower than it would otherwise be, or maybe it’s low for an extended period. A simple way to measure this is by tax bracket. The lower brackets, 10% and 12%, are no-brainers when it comes to considering a Roth conversion. From there the brackets jump to 22% and 24%, before jumping again to 32% and higher. Staying within the 22% bracket is usually solid for conversions, while the 24% can still make sense – it depends on your situation.

Essentially, we’d backfill “missing” income to the top of the bracket you’d otherwise be in since converted dollars are taxed as ordinary income. You can go into the next higher bracket, of course, but don’t do so by mistake.

You’d then plan to leave the converted dollars in the Roth for at least five years (and to at least age 59.5) for the money never to be taxed again. Given enough time, this Roth conversion process could grow your savings substantially to be spent by your surviving spouse or even your kids or other beneficiaries. The alternative is leaving the money to grow in your tax deferred accounts to eventually be required to be withdrawn and taxed later. That’s certainly not a horrible outcome, just potentially more expensive.

And if you’re younger and answer yes to the above questions, focus on making Roth contributions instead of traditional. That way you won’t need to convert, or at least not as much, because you’ll already be there.

JPMorgan’s asset management arm has been banging the drum for allocating beyond a typical 60/40 stock/bond portfolio for a while. Their recent research suggests that adding “alternative” asset classes like private credit, private equity, real estate and precious metals to name a few, can help achieve better risk-adjusted performance. The thinking is to take 5% from the stock side of your allocation and 5% from bonds and add to alternatives. Doing so has back tested well and could provide additional hedges over the next 10-15 years. Their 60/40+ portfolio concept could generate an extra 0.2% return over that sort of timeframe. Frankly, I think it speaks to diversification in general and making sure that everything in your investment portfolio is there for a reason. But back testing is tricky since, as we all know, past performance is not indicative of future results. And do you need expensive actively-managed funds and less liquid investments to accomplish what could be a marginal improvement? I’m not entirely sold on this but it’s an interesting idea to explore during the weeks ahead.

The Shutdown Snowball. According to my research partners at Bespoke Investment Group, impacts from the federal government shutdown continue to widen given that SNAP (“food stamp”) benefits for November likely won’t be disbursed for the roughly 40 million Americans, on average, who receive them monthly. These folks are geographically dispersed and SNAP dollars flow directly into the economy. Apparently Walmart alone collects about 25% of this spending, which makes sense. Bespoke doesn’t suggest that Walmart will suffer because of this lost consumer spending, but the longer the government shutdown goes, the closer it will feel to more Americans.

Personal politics and the understanding of political maneuvering aside, I vividly remember living off food stamps as a kid so it’s hard not to imagine the impact this will have on millions of households, even if it’s only one missed month. Add that to the myriad other issues impacting low-income Americans, and it could be a gloomy holiday season for many families. Consider donating to your local food bank – nonperishable food donations are good but, as I recall, cash is king because food banks can buy bulk food cheaper than you can.

Have questions? Ask us. We can help.

It seems like more now than ever how the economy is doing depends on who you ask. People with assets like houses and stocks have been saying they’re doing well even if many are worried about the health of the republic. The wealth effect (the psychological boost from rising asset prices) is in full force for affluent folks. This shows up in consumer surveys and spending on categories like premium seats on flights, fancier cabins on cruises, and “sustainable luxury” versions of electronic vehicles, to name a few.

Many of these people are also in the top 10% of earners who account for nearly 50% of all consumer spending in our economy. The rest are in the next 10% and add roughly another 10% to spending and round out the 20% of those considered affluent.

Perhaps capturing responses more from this affluent cohort, the Wall Street Journal had an interesting survey-based article in recent days. Here's a link: https://www.wsj.com/politics/policy/economic-outlook-sentiment-poll-quiz-99d71df8?st=8AZjVe&reflink=share_mobilewebshare

All this spending has been buoying the economy for a while and helps reduce recession risk, but the rising tide hasn’t been lifting all boats.

The other 80% of consumers cover the remaining 40% of spending and many (maybe most) of these folks are strained. Sustained inflation in key areas, a tight job market and stagnant wages, high borrowing costs, and repaying student loans – one or all these are hitting the average American consumer pretty hard. And the impacts tend to worsen as you go down the age spectrum.

This is an important structural issue within an otherwise healthy economy. While not necessarily new information, numerous sources have been reporting lately how the yawning wage and opportunity gap continues to widen. This is especially important with emerging AI technology and the lofty expectations for how it might impact the workforce.

My research partners at Bespoke Investment Group came out with a good piece last week looking at how younger Americans are doing economically when compared to other generations. Some of their findings are interesting, such as high unemployment rates for 20-somethings with a college degree versus their high school educated peers. This post is a little longer than normal due to several charts, but I’ll appreciate your patience.

From Bespoke…

There’s nothing new about concerns over “kids these days”. We can go back at least as far as the late Roman Republic and their fear of novo homo (new men) like Julius Caesar for conflict over and between generations. Today we’re going to take a look at the plight of younger Americans and how they’re performing economically.

First, we’ll start by looking at the distribution of wealth. With younger or first-time home buyers largely locked out of the housing market which has for so long been an engine of wealth for the American middle class, it’s easy to assume that Millennials (and their younger peers in Gen Z) will forever be locked out of the housing market. For now, that’s not what’s happening. As shown below, Millennials’ (defined as Americans born in 1980 or later) share of real estate wealth in aggregate is ahead of where Gen X (Born 1965-1980) was at the equivalent point for their generation. Granted, Gen X is much smaller than the Millennials, and both are well behind compared to the Baby Boomers (1946-1964).

Assets also don’t account for the debt that underpins them and in that respect the share of mortgage debt held by Millennials is an indication that they are at somewhat of a disadvantage relative to older generations. As shown in the chart top right, share of mortgage debt is far higher than Gen X was at this point (though again, well below that of Baby Boomers).

The Fed’s Distributional Financial Accounts are the source for this data and they don’t break out Gen Z yet; they are likely less than 1% of any net worth or asset figure given their age and the experience of Gen X and Millennials. That said, Millennials hold a greater share of net worth at present than Gen X did at their equivalent age. While their share of net worth is about half what the Baby Boomer’s was at this stage, the difference is much less significant than the current share of net worth controlled by the Baby Boomers compared to younger Americans.

The DFA data also lets us look at specifically under40s share of net worth and assets. As shown below, it has trended higher over the past 15 years, a stark contrast to the 1990s and 2000s (this data begins in 1989). In short, from a wealth perspective, younger Americans look to be worse off than previous generations in terms of share, but not dramatically so, and are building wealth on a trajectory similar to prior generations.

What about income? In the chart at right we show the median same-worker hourly wage growth by age, which is reported in the Atlanta Fed’s Wage Tracker as 12m moving averages for these demographic slices. As shown, the hot 2020-2021 labor market led to massive wage growth for younger workers, easily the highest since at least the late 1990s. Since, we’ve seen a massive decline. It’s important to keep in mind that the youngest workers always see the fastest wage growth. By virtue of both educational attainment happening early and low hanging fruit of productivity improvements happening earliest in a given worker’s career, every cohort of workers always experiences their fastest wage and salary growth in their 20s, before settling down into a much slower pace of growth that reflects the aggregate labor force.

That same dynamic is still true today, but we do note that young workers are seeing weak relative wage growth. Their advantage in the Atlanta Fed data is similar to what we saw in the extremely weak labor market of the early 2010s when national unemployment was still in a 6%-10% range and aggregate wage growth was much weaker. We should probably discount some of the weakness given the “overshoot” of wage growth in the early 2020s, but by any measure this labor market is generating relatively weak wage growth for the youngest workers, which implies relatively soft aggregate income growth as well. In other words: something is going on.

What about unemployment? Teenage unemployment looks relatively normal and similar to unemployment for 25-34 year-olds in terms of historical percentile. But 20-24 year olds have unemployment rates above the historical median and they’re rising quickly. That’s even more evident when we adjust for the national unemployment rate. After doing so, some things jump out. Teen adult unemployment is slightly lower than history on that relative basis, while 20-24 unemployment is near the 90th percentile! 25-34 unemployment is also higher than 76% of history relative to the national rate. What’s even more remarkable is that these spreads tend to be cyclical; we are not in the midst of a recession (when they historically tend to spike).

Recent announcements of job cuts from major companies have repeatedly come for the white collar labor force; in general this looks like reduced corporate head count with no impact on line or production workers. That helps illustrate a key dynamic in the labor market right now: the problem is less youth unemployment and more college educated unemployment. To illustrate, in the chart below we show the current percentile reading of unemployment relative to the national rate. Lower readings mean less joblessness for a given demographic relative to history and vice versa. As shown, for 16-24 year olds not enrolled in college and without a high school diploma, unemployment is historically low, in the bottom 4% of readings. Compare that to those not enrolled in college but with a high school degree, where unemployment is more elevated at the 70th percentile. And for 16-24 year-olds who are not enrolled in college having already earned a degree, unemployment relative to the national total is in the 95th percentile!

What makes this so striking is that we see the same pattern play out for older, more seasoned workers. Those with less than high school have low unemployment relative to the national economy and history, while those with college degrees are in a much tougher spot (again, relative to the total picture and compared to history).

The hot 2020-2021 labor market may have been a taste of what is to come given the rising unemployment among college graduates. Until that period, it was extremely unusual for college-educated workers to see wages rise slower than those with less education. But lesseducated workers outperformed dramatically in that tight labor market. Normalcy has returned over the past couple of years but recent data shows college-educated workers starting to lose ground again.

We haven’t talked at all about the causes of this shift yet, but the data supports the view that something is driving down demand for collegeeducated workers relative to supply of those workers. We see a range of possible explanations. One could be that more remote work has reduced the labor bargaining power of college educated workers in a given geography, eroding their wage premium or demand for their labor in aggregate. Another is that far higher prevalence of college educated labor (given that Millennials are by far the best-educated generation in terms of attainment and Gen Z is similar) means supply is outweighing demand. A third explanation is that the processes of management intensification and financialization in the 1990s through 2010s overshot and firms are now focused on simplifying operations to focus on line production. And AI is a final potential catalyst, though we note that this process appears to have been underway long before ChatGPT was released let alone widespread adoption of LLMs.

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The Social Security Administration has announced a 2.8% cost of living adjustment (COLA) for benefits beginning in January 2026. This is up from the 2.5% increase for 2025 but lower than the longer-term average of 3.1%.

This 2.8% COLA will bring the average monthly Social Security benefit to $2,071 for an individual and $3,208 for a couple.

SSA’s COLA is based on a particular version of the consumer price index, CPI-W, generated by the US Bureau of Labor Statistics from the third quarter to third quarter each year. CPI-W tracks spending on a basket of goods by urban wage earners and clerical workers and covers roughly 30% of the population. This contrasts with CPI-U, the widely reported inflation metric that tracks urban consumers and covers over 90% of the population.

The inflation metric being used is important for the obvious reason that a higher number means more money for Social Security beneficiaries the following year. But it also means, more or less, an additional drag on the Social Security “trust fund” we hear so much about.

Long-term funding problems for Social Security are nothing new. According to the recent annual trustees report to Congress, Social Security’s reserves are projected to be depleted by 2035, a year later than last year’s projection but still only ten years out. Benefit payments would be impacted if nothing is done between now and then, according to the trustees. But the trustees forecast the problem over a 75-year timeframe, so it isn’t like benefit payments would simply stop in 2035. Instead, the trustees speculate there might be a cut of 25% to future benefits. That’s probably the worst-case scenario given that current income for the plan is nearly enough to cover expenses, but the “nearly” part really adds up over time.

So there needs to be better alignment of income and expenses within the projections to close the current and projected annual deficit. Social Security trustees have repeatedly suggested to Congress that raising payroll taxes and reducing benefits could solve the problem, but there hasn’t been much political will for either regardless of which party is in power.

This is where tinkering comes in, or wonky changes around the edges of the problem to help bend the curve, so to speak. Examples include raising the full retirement age from 67 to 68 (it was originally 65 anyway) or older and maybe indexing it to longevity (I’m unsure how they’d do that, but it’s an interesting concept). There could be various forms of means testing, such as limiting benefit growth for higher income people, assessing higher payroll taxes on higher earners or a mix of tweaks, all trying to peck away at the big changes nobody in power wants to make.

Another example of tinkering is changing which CPI metric is used to calculate the annual COLA. The replacement metric often discussed is “Chained CPI”, or C-CPI-U. Chained CPI is preferred in some circles to CPI-U because its methodology captures consumers substituting cheaper items for more expensive ones as inflation heats up, reducing the overall inflation number. This potentially lower inflation reading would reduce COLAs and trust fund expenses by incrementally reducing benefits, especially over a 75-year period. That cherry-picking of data might seem a little underhanded but if it ultimately helps support the system, maybe that justifies the means? Others suggest using CPI-E, an inflation gauge targeted on spending by seniors. While that makes good sense at a higher level because it more accurately reflects the inflation being seen by actual beneficiaries, it could lead to higher COLAs and more of a drag on the system, so that’s probably a nonstarter. Can you sense the irony there?

I think (and hope) Congress will eventually figure this out because they need to. It’s just a question of exactly what they do and when, so plan ahead for various contingencies.

Ultimately, Social Security beneficiaries are getting a pay raise next year and that’s great. However, it’s wise to factor some sustainability stress tests into your plan if you’re currently receiving benefits or plan to do so soon. Tests could be lower COLAs over time to match up with Chained CPI, benefit reductions in 2035 and beyond, and so forth. I usually do this for clients anyway, but it never hurts to keep checking!

And for those who are still working for the foreseeable future, I suggest continuing to factor Social Security into your plans, just don’t rely too heavily on it. Test your plan for this and make strategic decisions as needed. And remember that Social Security was never meant to replace all of your pre-retirement income – it’s one leg on the retirement income stool and you should try to have as many legs as possible.

Have questions? Ask us. We can help.

It’s that time of year when many of us start fretting about year-end deadlines. Ensuring that impacted clients have taken their RMDs by December 31^st is a big one, but another is completing Roth conversions. I’ve discussed conversions before and the article below will go into more detail, but the concept is a moving target when it comes to retirement strategy and taxes.

Roth conversions sound straightforward – you’re prepaying taxes now on money you’ve saved in your tax deferred accounts like 401(k)s and Traditional IRAs, hopefully at a lower rate than in the future. Sounds simple, right?

But how do you know what your tax rates will be years from now? Do you know what your income will be? How about tax deductions and law changes that might impact your situation? Add the mental gymnastics needed to navigate our tax code and you’ve got a challenging planning landscape. However, there are benefits to converting traditional retirement money into a Roth IRA, so we shouldn’t let complexity dissuade us.

What follows is most of a recent article from Ed Slott, a nationally recognized expert on retirement-related taxes, addressing how recent tax law changes impact Roth conversions. Unsurprisingly, the new law didn’t reduce complexity. There’s a lot of interplay within your tax return and conversions can easily create unanticipated consequences, so don’t make conversion decisions in a vacuum, the author says.

You can and should consult with your tax preparer about this. And I have software that can help, so read on and reach out if you’re interested in getting a Roth conversion done by year-end.

From Ed Slott…

For retirement planning, a key part of the One Big Beautiful Bill is that it permanently extended reduced federal income tax rates enacted in the Tax Cuts and Jobs Act of 2017. Those lower brackets included rates of 10%, 12%, 22%, 24%, 32%, 35% and 37%, all of which were set to expire in 2026. (The rates that prevailed before 2017—and would have prevailed again—were 10%, 15%, 25%, 28%, 33%, 35% and 39.6%).

Of course, “permanence” in tax law lasts only until a future Congress changes the rules. Still, given today’s political situation, it’s likely that the current relatively low tax rates will be in effect through at least 2026 and likely beyond.

So what does this have to do with retirement planning?

The answer lies in the nation’s future liabilities and its debt, especially as the U.S. looks for ways to keep supporting programs such as Social Security and Medicare. Because of those obligations, some observers expect tax rates to rise again sharply in the future, perhaps in a way that affects the high-income taxpayers most likely to use financial advisors and tax professionals.

In particular, there are concerns about people who hold pretax retirement accounts and face required minimum distributions every year once they reach their 70s (the exact start date depends on their year of birth). Hefty withdrawals by that time may be taxed at steep rates.

If current owners do not deplete their tax-deferred accounts, the RMDs will pass to their beneficiaries, who could then owe the resulting tax in addition to their own obligations. Furthermore, the SECURE Act has accelerated those distributions to beneficiaries, which could mean more taxes bunched into more years.

Roths To The Rescue

Roth IRA conversions are an appealing way to trim these deferred taxes, and if the conversions are done prudently, they could keep people’s tax bills in the 24% bracket (or even the 22% one) for as long as the One Big Beautiful Bill is in effect. This year, a married couple could have up to $394,600 in taxable income (after deductions) and owe no more than 24 cents on each taxable dollar. But after a Roth conversion, qualified distributions (including any post-conversion gains) are tax-free for account owners and their beneficiaries. Then the owners don’t face required minimum distributions at any age.

Therefore, a plan that calls for cautious annual Roth conversions, within moderate tax brackets, eventually could reduce or even eliminate RMDs. The trap, though, is that a current Roth conversion must occur during the taxable year (by December 31, 2025, say). That’s a problem, since a person’s exact numbers on their taxable income for that year won’t be known until after that (say, by April 15, 2026) when the return is filed. That means if they want to shift dollars to the Roth side they’ll have to do some guessing with the numbers they know in order to keep their reported income within a desirable bracket.

Creating Complexity

However, the One Big Beautiful Bill also came with tax benefits, which can have a flow-down impact on the taxation of Roth conversions.

One of the most notable changes is the increase in the state and local tax deduction. Since the Tax Cuts and Jobs Act took effect, people who itemize deductions on Schedule A of IRS Form 1040 could deduct only $10,000 for all taxes (income, property, etc.) imposed by states and localities (for both single taxpayers and those filing jointly). Many instead shifted away from itemizing and took the standard deduction.

There’s a case for continued itemizing under the new law, however. For the tax years 2025 through 2029, the SALT deduction rises to $40,000 […]

The combination of tax cuts and Roth conversions sounds like a potent one-two punch. But there’s a catch: The higher SALT limit starts to phase out and goes to 30 cents on the dollar for those whose modified adjusted gross income is $500,000 to $600,000. When MAGI [Modified Adjusted Gross Income] rises above $600,000 or more in 2025, the state and local tax deduction cap reverts back to $10,000 […]

If a taxpayer’s MAGI falls in the phaseout range, though, Roth conversions might create the same sort of “tax torpedo” that happens when IRA withdrawals are added to Social Security benefits—it leads to a spike in marginal tax rates […]

Tackling the Trade-Offs

Beyond the SALT changes, taxpayers may want to consider other provisions of the One Big Beautiful Bill when making Roth conversion decisions. They might, for example, take into account the 20% qualified business income deduction, which also has been made “permanent” for now. For the self-employed individuals and small business owners who qualify for the deduction, the income limits have been expanded.

In 2025, the 20% deduction applies for single filers with taxable income of up to $197,300 or joint filers with income of $394,600. The deduction starts to shrink for the next $50,000 of income (for single filers) or $100,000 (for joint filers). It disappears when singles make $247,300 or joint filers make $494,600. With higher taxable income, there is no qualified business income deduction for certain personal service businesses (which are called “specified service trades or businesses” by the IRS and apply to fields like health, law and accounting) […]

A 20% tax deduction can be appealing, but its availability makes Roth conversion decisions difficult. Such conversions will increase taxable income … and also increase the QBI deduction! But if the Roth conversion puts taxable income over the upper number, the qualified business income deduction might be lost altogether. Fine-tuning is necessary, especially considering that a person’s actual taxable income for 2025 won’t be known until a tax return is filed in 2026.

Yet another innovation of the new law is a $6,000 senior deduction for people age 65 and older (up to $12,000 for married couples) that’s in effect from 2025 through 2028. Again, there is a MAGI phaseout, which runs from $75,000 to $175,000 for singles and from $150,000 to $250,000 for joint filers. Taxpayers who qualify can take the deduction even if they itemize.

With relatively low MAGI limits, Roth conversions might push reported income over the high end of the phaseout range, zeroing out the senior deduction. But people edging out of the phaseout range probably will be in the 22% tax bracket, for a maximum per person tax savings of $1,320 (22% times $6,000). In the long-term, the benefits from a substantial Roth conversion might be worth losing the short-term tax savings.

Final Thoughts

These provisions of the One Big Beautiful Bill must be taken into account for retirement planning, with taxpayers carefully considering the differing MAGI limits and effective dates. Roth conversions are likely to deliver long-term, tax-free benefits. Yet they may result in short-term losses of MAGI-based tax deductions.

The key takeaway is that Roth conversions cannot be done in a vacuum. Taxpayers and their advisors should look at the full array of tax benefits generated by the new law, year after year, and decide how to proceed in order to optimize their overall retirement and estate plans. 

Here’s a link to the full article if you’re interested.

https://www.fa-mag.com/news/how-new-tax-law-affects-roth-iras-84152.html?section=2

Have questions? Ask us. We can help.