Source: MSN Money
President Donald Trump has finally gotten his first major piece of legislation — and it’s about as big as it gets: a comprehensive overhaul of the U.S. tax code. Depending on your personal situation, there are a few moves you may want to take before December 31 that could add a few more bucks to your retirement savings account.
First, let’s clear up something that you may have been worrying about, and that concerns how much of your pre-tax income you can stuff into your retirement plan. Currently you can put up to $18,000 of pre-tax income into your 401(k) plan annually. GOP lawmakers had floated the idea of slashing this to just $2,400. If you thought that was a dumb proposal, you weren’t alone: the idea was scrapped under an avalanche of pressure, and this important way to save for your golden years was preserved. In 2018, in fact, it gets slightly better, allowing contributions of up to $18,500 pre-tax into a 401(k), and up to $5,500 in an IRA. If you’re over 50, the “catch-up” contribution limit remains $6,000, as does the limit of $1,000 for Individual Retirement Accounts (IRAs). For anyone concerned about saving enough, this is a relief.
There is one major change to IRAs under the new law. Currently, withdrawals are taxed unless you live in a state that doesn’t tax retirement income. But what if you live elsewhere and don’t want to pay those IRA taxes when you retire? The Roth IRA is a solution, allowing your funds to grow tax free if you pay a tax up-front when you open the account. If you opened a Roth in say, 2009, the stock portion of your account has soared tax free.
Yet with U.S. stocks at record levels, there are growing fears of a market correction (when stocks drop 10%), or worse. So if you converted into a Roth recently, you paid taxes up-front on gains that could go poof in a market decline. That’s not good — who wants to pay taxes on non-existent value? You can convert back to a regular pretax IRA — which means you pay taxes later. But here’s the catch: the new tax bill requires you to make this “reconversion” by December 31.
“The new tax law removes the ability to reverse the conversion of a traditional IRA to a Roth IRA via what’s known as ‘recharacterization,’” says George Forsythe, a managing partner at accounting firm Wells Coleman. He adds: “Once you convert, it’s final and cannot be recharacterized back as you could under previous rules. Contributions to 401(k) remain the same and “backdoor” Roth IRA funding is still on the table via a non-deductible Traditional IRA contribution then converted into a Roth IRA.”
If this sounds a bit complicated, you’re right, so your best advice here is to call your financial adviser or retirement specialist. But hurry: the clock is ticking.
Doing nothing is also an option, and that could be the best decision, particularly if you’re young and are in a Roth now. Your account will have plenty of time to recover from any market pullback, and you’ve already paid taxes on any gains. Another benefit: if Uncle Sam decides to raise taxes in the future — growing deficits certainly make this a possibility — you’ve already paid at a lower tax rate. Again, talk this over with your adviser.
There’s one other important thing to know if you’re a retiree — or will become one in 2018. Namely, you’re getting a modest raise. Social Security checks will go up by some 2%, based on the government-tabulated Consumer Price Index. Don’t go on a spending spree: it works out to about $27 a month for the average recipient. And don’t think you’re getting ahead by 2%; that hike is based on the CPI —a measure of inflation— which eats away at your purchasing power. And medical care costs are expected to rise even faster than the basic inflation rate in 2018, so the net net here is that you may be digging deeper into your pocket in the new year.