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How the New Tax Bill Impacts Your Retirement

Key Takeaways

  • The Tax Cuts and Jobs Act was signed into law on December 22, 2017, resulting in many changes for 2018 and beyond.
  • As of January 1, 2018, you are no longer allowed to recharacterize your Roth IRA back to another retirement plan.
  • Fees associated with your financial professionals are no longer tax deductible.

With the signing of a new tax bill on December 22, 2017, you might be wondering how these changes will impact how you manage your finances.

While one of the biggest aspects of the new tax bill — called the Tax Cuts and Jobs Act — has to do with federal income tax bracketing, it can also impact your retirement planning.

Here are two ways the new tax bill could impact your retirement.

1. Roth recharacterization

The two most common Individual Retirement Accounts (IRAs) are Traditional and Roth. A Traditional IRA allows you to make tax-deferred contributions to your retirement plan, and when it comes time to withdraw, you pay taxes on each disbursement. Meanwhile, contributions to a Roth IRA are made after taxes, but disbursements are not taxed.

Some people decide to switch their Traditional IRA to a Roth IRA in order to capitalize on the tax-free disbursements. (They also might convert their SIMPLE or SEP IRA to a Roth IRA for the same reasons.)

However, those who converted their funds to a Roth IRA might decide to switch back to their previous IRA, a process known as recharacterization. Why might they do this?

  • Their investment lost value since the recharacterization.
  • They expect their taxable income in retirement to be lower than they once thought, thus reducing the benefits of the tax-free disbursements of the Roth IRA.
  • They need more cash in the present, so tax-deferred contributions to a Traditional IRA becomes more appealing.
  • The income from the Roth IRA has bumped them into a higher federal income tax bracket.

However, that has changed.

As of January 1, 2018, you can no longer recharacterize. Going forward, once you convert to a Roth IRA, it stays a Roth IRA. You cannot switch back to your previous account. Those who converted to a Roth IRA in 2017 will be able to recharacterize up until October 15, 2018, but any Roth IRA conversion made in 2018 and beyond cannot be recharacterize.

Did you roll over a 401(k) or 403(b) plan to a Roth IRA? The same rules apply — you can no longer recharacterize.

2. Investment fees

Before the new tax bill, you could deduct all fees and expenses related to your investments — such as management fees — if those expenses were at least 2% of your adjusted gross income.

Starting in 2018 and lasting through 2025, these fees are no longer deductible. This is important to note if you’re deciding between an advisor that works on commission and one with a management fee.

The bottom line

Your retirement plan is a critical part of your future. Take a look at your current plan to see the changes implemented in the Tax Cuts and Jobs Act will impact your strategy, particularly if you were considering converting to a Roth IRA.

More information

Everyone has their own expectations and goals for retirement, but we could all use a plan on how we’ll get there. To learn how we can help you prepare for the retirement you want, schedule a Citizens Retirement Checkup®.

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