In late December, the Tax Cuts and Jobs Act spelled big changes for many individuals. Retirees and those close to retirement may be wondering how this will affect the taxation on their funds. The good news is that many limits and regulations involving retirement accounts are staying the same. There are, however, a few changes investors should be aware of in the coming months. Let’s take a look at what’s staying the same and what’s changing starting in the 2018 tax year.
Staying the Same
Before the Act was passed, there were talks about changing pre-taxed contribution limits on 401(k) accounts. In the final draft, limits were left untouched at $18,000 for 2017 and $18,500 for 2018.
The Senate was also looking into restricting the sale of stocks and mutual funds, as right now investors can pick and choose shares to sell if they are selling part of their investment. Many people choose the shares that allow them to pay the least amount in taxes on the gains from the shares. The proposal didn’t make the final draft, and investors still have the liberty to decide which shares to sell.
Changes that Retirees Should be Aware of
The structure of tax brackets is shifting, and it could mean the taxes you pay on Roth IRAs now, or Traditional IRAs upon distribution, will change. If you qualify for a lower tax bracket now, it’s a great time to contribute to a Roth IRA in case congress decides to change the brackets again in the future.
If you’re close to 70 ½, you may want to take another look at the required minimum distributions (RMDs) you’ll have to be taking soon. RMDs are based on a percentage of the total amount of funds you have in your IRA account, so it’s less and less each year. If you have to take a large RMD, it could bump you up to the next tax bracket. You could distribute some funds now to avoid the higher tax bracket, but this only makes sense if the amount you save in taxes outweighs the amount you could have earned on the funds if they were left in your account. Talk with your financial advisor to see if this makes sense for you.
There are a few deductions taxpayers can no longer claim on 2018’s taxes. One is the deduction for fees paid to an investment advisor. Although, this one is set to return in 2025. For those who are used to deducting state and local income and property taxes, you’ll be limited to deducting only a maximum of $10,000 total from now on. If you live in an area with high income and property taxes, you could consider a move at retirement to a location with no income tax to keep from missing out. Keep in mind, moving expenses are no longer deductible as well (except for members of the military).
Investors who have moved funds from a Traditional IRA to a Roth IRA, but took a loss and don’t want to pay taxes on money they don’t have, had the option to recharacterize the Roth back to a Traditional IRA before the end of the year. This is no longer allowed, so investors and retirees need to carefully consider Roth conversions now more than ever. You can wait until close to the end of the year to convert so you’ll know that you have enough to pay the taxes on the Roth funds before transferring.
Deductions for medical expenses are also getting a slight change. Before citizens could deduct whatever expenses exceeded 10% of their AGI, and it’s now been lowered to 7.5% of their AGI. This is helpful for seniors with low income and high or long-term medical expenses. This will be set to return to 10% in 2019.
Charity is another area where retirees may benefit. Up to 60% of AGI may now count toward tax deductions. For retirees who don’t qualify for many deductions, they can take full advantage of this increase by giving directly from their IRAs double the amount they usually give, but only every other year.