What You Need to Know About Tax Reform and Retirement

Why It Matters:

  • The new tax law presents several subtle changes to retirement planning.
  • Clients need to know how their retirement plans may be affected.
  • There were many ideas reflecting retirement that were floated – these are the ones that survived.

Tom Nawrocki tkc.profilePicture Written by: Tom Nawrocki | Transamerica
Jan. 26, 2018

4 Min readClock Icon

The tax reform bill signed into law by President Trump on December 2 was a sprawling monster. More than 500 pages long, its hundreds of provisions extended into the far corners of the tax code, including retirement planning.
There are several new wrinkles anyone seeking a healthy retirement would be wise to take note of. But first, let’s note that one much-rumored change isn’t taking place. There had been rumblings that the annual pre-tax limits for 401(k) plans might be reduced, reducing the amount retirement savers could salt away tax-free.

That didn’t survive to the final bill, but here are a few items that did make it into law:

Estate Tax

The estate tax exemption has been raised to more than $11 million per person, or $22 million per couple, for tax years from 2018 through 2025. And that exemption amount is indexed to inflation, so it may be gradually adjusted upward over the coming years. The maximum tax rate is unchanged, at 40%.

Perhaps more importantly, inheritors don’t have to pay capital gains taxes on the increase in value of the estate’s assets. Someone who inherits stock that has doubled in value will only ever pay capital gains tax on the stock's appreciation after they inherit it [The decedent's estate pays the estate tax on the full fair market value of the stock at the decendent's date of death]. The capital gain on that stock will go untaxed, on either the person who bought it or the person who inherited it.

Roth IRA Conversions

Recharacterizations of Roth IRA conversions are no longer allowed. To back up for a second, a Roth IRA is funded with non-deductible, post-tax dollars, but the money you withdraw in retirement is tax-free. A traditional IRA is funded with pre-tax dollars, but the withdrawals are taxable. A Roth conversion allows a taxpayer to convert a traditional IRA to an after-tax account, which is still kosher. But a recharacterization, undoing that conversion, is not.

Repaying Loans from a Retirement Plan

In the past, workers who had taken a loan from their retirement plan, then left that employer, had just 60 days to roll that money into an IRA. Otherwise, they’d be taxed on the loan amount. The new bill extends that deadline to whenever their individual tax return is due. But they still have to contribute that loan balance to an IRA in order to avoid the tax penalty.

Possible Decline in Retirement Plans from Small Business

People employed by small businesses may be less able to get retirement plans, because the tax changes make them less beneficial for small business owners. Because of the lower tax rates on pass-through businesses, some small business owners would end up paying more in taxes on contributions to a retirement plan than if they took that business income simply as current income. That takes away one of the key financial incentives for small businesses to establish a retirement plan.

Student Debt Now Avoids a Tax Hit

If you’re carrying a sizable student debt into your retirement years, you no longer have to worry about a tax hit being passed along to your estate. In the past, if you died (or became disabled) and your lender discharged your student debt, your estate still had to pay the income tax on that forgiven debt. Under the new law, both federal and private student loan debt forgiven due to death or disability will not be taxed.

Shortage of “Safe Haven” Investments

One of the biggest changes to the tax code won’t directly affect retirement savers but may make it more difficult for companies to find safe havens for their retirement funds. Since the law encourages companies to bring overseas earnings back to the U.S., firms may end up borrowing less. Bank of America estimates this could reduce the supply of investment-grade bonds by as much as 17% next year – possibly driving down the returns on those bonds.

More Money in the Market

On the other hand, the law reduces the tax on corporate profits, which could have a positive effect on equity values. Since many retirement accounts are heavily invested in the stock market, this could help their value rise.

Things to Consider:

  • If you have a sizable estate, the estate's potential tax liability is greatly reduced through 2015.
  • Your options for changing your retirement plans have been tightened up.
  • Some small businesses may now be less likely to offer retirement plans.

Neither Transamerica nor its agents or representatives may provide tax, investment or legal advice. Anyone to whom this material is promoted, marketed, or recommended should consult with and rely on their own independent tax and legal advisors and financial professional regarding their particular situation and the concepts presented therein.



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