After 30 years, Trump’s tax code plans aim to reduce taxes for the middle-class and corporations. However, this, in turn, has serious ramifications for 401(k) owners retirement plans.
The new Trump Tax Code offers a number of opportunities to save significantly for a limited period of time. Qualified retirement plans (IRA’s, 401K’s, 403B, 457 plans, TSP’s, SEP’s, etc.) lead to problems that most people who are nearing retirement, or are retired often don’t expect.
Problems With Your Retirement Accounts:
- Every distribution is taxed at your highest rate.
- Distributions may put you in a higher tax bracket.
- Distributions often lead to an additional tax on your Social Security Income.
- Distributions can lead to more tax on capital gains.
- It’s the only account that requires distributions, even if you don’t want or need the money.
- It’s the highest tax account to leave to your heirs.
- During retirement years, you can easily argue these are the least tax-efficient you own.
How Could the New Tax Code Help?
With the new tax brackets, for single files filing the tax deductions are higher in 2018 than in 2017. For married filers filing jointed the deduction is much higher in 2018 than 2017.
All in all, more of your 401(k) money will be taxed similarly to your savings directed into Roth IRAs: You would put in after-taxes, then withdraw money tax-free during retirement.
There’s already a Roth 401(k) that works this way, and it has been slowly gaining momentum.
One of the best ways to reduce the tax liability of your retirement accounts over time is to pay some tax today (at the new lower rates) and shift money into a Roth IRA. This could save you taxes significantly during your retirement years.
You ask, why you move money from your IRA to a Roth IRA?
The Benefits of a Roth IRA Conversion:
1.) Tax-free distributions (assuming you follow the five-year rules).
2.) If you are over 59 1/2, immediate access to funding, tax-free with no penalties.
3.) No required minimum distributions. Freedom of choice.
4.) Tax-free inheritance to beneficiaries if set up correctly.
5.) It’s grandfathered in against any future tax law changes.
Before you rush out and start transferring your retirement accounts to Roth IRA’s, you really want to meet with a financial planner and your CPA to look at the differences to make sure it makes sense for you financially and to make sure it makes sense for you tax-wise.