Tax reform and how it affects your retirement plan

Business News | 11 Jun |

Author Calvin Goetz, co-founder of Strategy Financial Group, LLC, an Arizona registered investment advisor, has dedicated more than a decade of his professional career to serving the financial and retirement planning needs of clients across the nation.

The Tax Cuts and Jobs Act signed into law on December 22, 2017 included well-known changes such as reduced tax rates and increased standard deductions. Some lesser known changes, however, may require you to reevaluate your current retirement savings plan in order to take advantage of breaks and avoid pitfalls that may have been introduced in the tax reform bill.

What’s Unchanged

Your ability to make pre-tax salary deferrals to your 401(k) is unchanged. Proposals to require after-tax contributions instead of pre-tax never made it into the final legislation, despite rumors of its demise. The stretch IRA also remains on the table as a planning strategy for you to leave your retirement funds to your heirs.

Changes to Consider

1. Lower tax brackets and the limitation of the alternative minimum tax (AMT) to very few taxpayers may make Roth IRA conversions even more sense now than ever. This may be the time to have a conversation about conversion with your advisor.

2. Tax reform changes to the Kiddie Tax may be another reason to convert to a Roth IRA. The new law taxes children’s unearned income at a tax bracket rate imposed on trusts and estates, not the rate paid by parents or the child’s own rate. The new rates can be much higher. Required minimum distributions from an inherited IRA are ordinary unearned income taxable at top rates. So distributions to children from inherited IRAs can get hit with very high rates very quickly, even if parents are paying lower taxes. Converting to a Roth IRA eliminates this because required minimum distributions from a Roth IRA are tax-free.

3. Consider a backdoor Roth IRA if your income is too high for you to make Roth IRA contributions. If you had concerns about this tactic in the past, you can rest easy. The committee reports that were released along with the new law explicitly mentioned the tactic on four separate occasions. However, you must have taxable compensation and be under age 70 and a half for the year to be eligible. Also the pro rata formula will apply.

Talk to your advisor about how you can take advantage of tax code changes or how you can avoid a negative impact on your current retirement strategy.

 

Financial adviser, retirement wealth strategist, founder of Strategy Financial Group and author of “Climbing the Retirement Mountain,” Calvin Goetz is an Investment Adviser Representative who holds the Series 65 securities license, is life and health insurance licensed in the state of Arizona and is a member of Ed Slott’s Elite IRA Advisor Group™ and the National Association of Insurance and Financial Advisors (NAIFA). For more information, visit StrategyFinancialGroup.com. Strategy Financial Group does not provide specific legal or tax advice. Please consult with your tax or legal professional for guidance on your individual situation. Investment advice is offered through Strategy Financial Services, LLC, a Registered Investment Adviser. Insurance and annuity products are offered separately through Strategy Financial Insurance, LLC.

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