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While Others Debate New Tax Law, Stay Focused on Your Own Plan

The recent tax law changes may be out of your control, but you still have quite a bit of power over your own tax destiny using tried-and-true tax strategies.

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The tax overhaul is a hot topic these days, and investors should stay aware of any changes that could eventually affect their retirement plans.

SEE ALSO: New Tax Law 2018: Test Your Tax Smarts

But the truth is, even with all the changes made after President Trump signed the Republican tax plan into law, don’t lose sight of the tax opportunities that have been available to you for years. So even as you parse what the new law means for your finances, it pays to also focus on what you can do under the old laws. Your goal should be to maximize every savings opportunity available.

Here are four things you can do right now:

1. Know your contribution limits.

The limit for tax-deferred retirement accounts (401(k)s, 403(b)s, etc.) was $18,000 for the past three years, but it has risen to $18,500 for 2018. If you’re 50 or older at the end of the calendar year, you also can make a catch-up contribution of $6,000 (the same amount since 2015).


Also unchanged for 2018, your total contributions to all your traditional and Roth IRAs cannot be more than $5,500 ($6,500 if you’re age 50 or older) or your taxable compensation for the year if you earned less than your limit. Once you know your limits, you should contribute up to the maximum allowed based on your ability to save.

2. Look into a Roth IRA or, if your employer offers the option, a Roth 401(k).

Roth IRAs provide no tax break for contributions, but earnings and withdrawals are generally tax-free after age 59½, as long has the account has been open at least five years. And, unlike a traditional IRA, you won’t face required minimum withdrawals at age 70½, which you’d have to pay taxes on. Instead, you can let your Roth IRA grow tax-free throughout your lifetime. Another bonus: If you need the money, before age 59½, Roth contributions (but not earnings) can be withdrawn penalty-free and tax-free at any time.

The fact that the tax rates just went down a little is even more of a reason to consider Roth contributions. In effect, the tax deduction of a traditional 401(k) and IRA is worth less to you when you are at a lower tax rate.

So, who should do a Roth? People who believe their taxes will be higher in the future. Those people could include:

  • Younger people who expect to advance in their careers and earn more.
  • People whose incomes are steady but who think these tax cuts represent only a temporary tax break.
  • Retirees who see their future taxable incomes going up due to required distributions beginning at age 70.5.
  • Even those later in life may want to consider Roth conversions if they may pass some of the money on to younger beneficiaries.
  • Finally, and it’s not the most pleasant thought, but if in a married couple one spouse is much older or in declining health, they may consider a Roth conversion while they have the benefit of the married filing joint tax tables, vs. in the future when one of them will be back to a single taxpayer bracket.

See Also: What's Changing in Your Retirement Accounts in 2018, and How to Take Advantage

3. Find out if you’re eligible for a health savings account.

Contributions to an HSA are tax-deductible. (If your contributions are deducted from your paycheck, they’re considered pretax.) The money is also tax-free coming out, as long as you use it to pay for qualified health care expenses. It’s the best of both worlds. In 2018, the contribution limits are $3,450 for individuals and $6,900 of you have family coverage. You can also put in an extra $1,000 if you’re 55 or older.

To qualify, you must be covered under a high-deductible health plan, although be aware that not all high-deductible plans qualify, so it’s best to ask the insurer itself whether your plan is HSA-eligible.

4. Be aware of how Social Security income is taxed, and manage your tax bracket accordingly.

Your Social Security benefits can be taxed when your combined income exceeds the designated threshold ($25,000 for single retirees or $32,000 for couples filing jointly). It’s important to understand that all income is counted, including tax-exempt interest from state and municipal bonds.

The ultimate goal in retirement is to have the income you need and want without taxes eating up your nest egg. And a great way to do that is to keep your money in different “tax buckets.”

  • The taxable bucket includes everything you’ll pay taxes on every year, including your brokerage and bank accounts, certificates of deposit, interest on bonds, etc.
  • The tax-deferred bucket holds your 401(k) and/or IRA. You don’t pay taxes when you put money in or while that money is growing. But eventually you’ll have to pay taxes on 100% of everything that’s in this bucket, which could push you into a higher tax bracket in retirement.
  • The tax-free bucket is for Roth IRAs and Roth 401(k)s, along with specially designed life insurance policies and municipal bonds. (But remember, the interest on municipal bonds can make your Social Security benefits taxable. See No. 4 above.)
  • Your tax obligation doesn’t stop when you die, so if you plan to leave a legacy for your loved ones, the estate- and income tax-free bucket is important. If a big part of what you leave behind is in a tax-deferred retirement account, Uncle Sam will still want his share. By using life insurance and other estate- and income tax-free vehicles, you can either avoid the tax or pay pennies on the dollar.

I’m always bewildered when prospective clients come in with what they think is a comprehensive retirement plan, and it doesn’t include any tax strategies. The financial industry puts such an emphasis on investing — with financial professionals often bragging about returns and their ability to earn more than the next guy — that pre-retirees and retirees tend to ignore the impact taxes can have on their bottom line.

What’s the point of earning an extra 1% if you end up giving it all — and more — back in taxes?

While the nation’s pundits and policymakers debate the pros and cons of the Trump administration’s new tax law, why not turn your attention to what you can control? Talk to your tax professional and your financial adviser about building a solid plan that will help you hold on to more of your money in retirement.

See Also: The 3 Spending Stages of Your Retirement

Kim Franke-Folstad contributed to this article.

Michael Neuenschwander, CPA, CFP®, teams with his father, Allen Neuenschwander, CPA, CFP®, at their financial planning firm, Outlook Wealth Advisors LLC in Texas. Michael is an Investment Adviser Representative and a licensed insurance professional.

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