What the House Tax Bill Could Mean for Your Savings and Retirement

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.

A Checklist of Possible Year-End Deductible Contributions

As tax time rolls around, most of us will be looking to reduce our annual tax bill as much as possible. Since no one is going to want to lower their income, the best way to pay less in taxes is to make sure you’re not missing out on any big deductions. Below is a checklist of possible year-end deductions to consider.

Deductions for Contributions to a Traditional IRA. Depending on your income and whether you’re covered by a retirement plan at work, you may be able to contribute to a traditional IRA for tax year 2013 and deduct the full amount. Alternatively, you may decide that the value of a tax deduction this year is outweighed by the aggregate tax savings you’d realize by contributing to a Roth IRA instead.

Your Home Mortgage Interest Deduction. For years. one of the most valuable deductions for U.S. taxpayers has been the home mortgage interest deduction. While there are some limitations on the availability of this deduction (most notably, that it relate to the taxpayer’s primary residence or second home, and that only the first $1,000,000 of debt is covered), most homeowners can save significantly on their taxes if they have a mortgage on their homes. The amount you pay each year in property taxes is similarly deductible.

Charitable Contributions. Cash and non-cash property contributions to nonprofit charities are generally deductible, but you should take care to properly document your contribution worth more than $250. and to verify that the recipient is appropriately recognized as a nonprofit charity.

Educational Expenses and Student Loan Interest. Depending on your income, you may be able to deduct a certain amount of tuition-related expenses, and a portion of the interest relating to any student loans you may still be repaying. You may also be able to make deductible contributions to certain types of tax advantaged college savings accounts for your children.

Review the Applicable Caps and Limitations. It’s essential that you understand the various limitations and caps on certain types of deductions. Charitable deductions, for example. are generally limited to either 30% or 50% of your adjusted gross income. These caps and limits can change from year to year, so don’t assume that the rules you followed in prior years still apply.

Pre-Tax Contributions. In addition to the deductible contributions you itemize on your tax return, be sure to consider any available opportunities you have to make pre-tax contributions that will benefit your overall financial situation. For example, contributions to an employer-sponsored 401(k) plan or to a health savings account are generally made with pretax dollars. This lowers your adjusted gross income, which effectively lowers the amount of tax you pay and potentially makes other deductions available to you (by virtue of your lower AGI).

Every year you must balance the overall value of these deductions against the standard deduction. Most middle and higher income taxpayers (particularly homeowners) will benefit from itemizing, but that’s not always the case.

Avoid These Mistakes When Buying Real Estate with a Self-Directed IRA

The self-directed IRA can be an extremely powerful tool for building up your retirement nest egg. With the proper custodian, you’ll be able to invest in assets that many IRA custodians choose not to allow. One of the most popular investments within a self-directed IRA is real estate.

But there are some aspects of buying and holding real estate within an IRA which make the implications of that type of investment significantly different from buying stocks or mutual funds. Individuals who haven’t properly planned ahead can find themselves facing significant financial penalties by virtue of their IRA investments in real estate.

If you want to avoid making this costly mistake, the specialists at Quest Trust Company can help you steer through all the information and help you to make a sound decision. They’ve been helping individuals like you make decisions about their self-directed IRA and invest for their future.

Here are some of the most common mistakes they can help you to avoid.

Not Having Enough Account Assets to Cover Real Estate Carrying Expenses. Holding real estate as an investment involves a number of different expenses. There are annual property taxes that must be paid, property insurance premiums to be paid, monthly assessments (if you hold a residential condominium or co-op), payments to the property manager, upkeep and repairs, as well as principal and interest payments if the property is subject to a mortgage.

Unless you have enough additional cash or liquid assets within your self-directed IRA to pay all of these expenses, you’ll need to rely on the cash flow that’s generated by the property. You might purchase a property expecting a certain level of cash flow, but what happens if you can’t find a tenant and the property sits vacant for a few months, or you have a significant unexpected expense related to the property? Unless you have enough additional cash in your account, you might have to make additional contributions to your account that could threaten its tax advantaged status, and potentially result in a taxable distribution, plus the possibility of additional penalties.

Personal Use of Real Estate Held by IRA. You are prohibited from any personal use or immediate benefit of any asset held by your IRA, including real estate. So while it’s legally permissible to buy a property now that you plan to eventually use as a retirement home, you cannot occupy or use that property before retirement, even for a single day or weekend. There can be no personal use of any real estate held by an IRA before you retire.

Not Taking Into Account Future Taxes. Once you retire, if you take possession of a piece of property held by your IRA, you may owe taxes on that distribution. If your self-directed IRA is set up as a Roth IRA, then you won’t owe anything (since you contributed after-tax dollars to the account, and distributions from a Roth IRA are tax free), but you may be hit with a sizable tax bill if your self-directed IRA is formed as a traditional IRA (rather than a Roth). Be sure to take any future tax liabilities into account when considering a real estate purchase within your self-directed IRA.

Provided that you understand all of the implications of holding real estate within a self-directed IRA, doing so may help you build a significant retirement nest egg, or even help you retire into your dream home. Contact Quest Trust Company today at 800-320-5950 for a free consultation and find out how you can avoid mistakes with your self-directed IRA that will affect your financial future.