On April 26, 2017, the Trump administration released its highly anticipated tax reform plan. The administration said the goals of the plan include growing the economy, creating jobs and simplifying the tax code. The changes proposed are significant and if passed (and that is a big “if”) could have a major impact on your retirement planning.
A Tax Overhaul
The Trump administration wants to tackle comprehensive tax reform, and that is a tall order. There are many areas of the tax code that they are proposing to overhaul. Here are some of the key changes that are being proposed:
- Reducing the number of tax brackets to three brackets of 10%, 25% and 35%
- Doubling the standard deduction
- Eliminating individual tax deductions except those for home ownership and charitable gifts
- Repealing the alternative minimum tax
- Repealing the estate tax
- Repealing the 3.8% tax on investment income
- Cutting taxes on business to 15%
No Easy Task
Tax reform is no easy task. The devil is in the details. The plan is only one page long and less than 200 words, so there are plenty of unknowns. Exactly how each of these changes would be accomplished is unclear. There is expected to be significant resistance in Congress for many reasons. While the Trump administration claims that the growth resulting from these tax changes would cover the cost, not everyone agrees. There is concern about deficits resulting from tax cuts. If the tax cuts proposed under the plan are not revenue-neutral (in other words, they cause no increase in the deficit), the support of Democrats will be necessary to make the tax legislation permanent under budget rules. If not, any changes made to the tax code will sunset in 10 years.
How would the Trump tax plan affect your retirement? At this point, details are scarce and the plan’s future is anything but certain, but here are a few things for you to keep in mind about your retirement strategies as the tax plan works its way through Congress.
Estate Tax Elimination -The repeal of the estate tax would be a significant change to how retirement planning works. While only a small percentage of estates are hit with this tax, those that are affected are hit hard. A repeal of the estate tax would mean that many estate plans would have to be revisited. It is also worth noting that the estate tax has risen from the dead before, and even if this legislation ultimately comes to pass, it could do so again. Also, the end of the estate tax would not be the end of the need for estate planning. There are many other important planning areas that would still need to be addressed to best protect assets for heirs.
Retirement Plan Changes -It remains unknown at this time whether the Trump administration plan will affect retirement plans such as your IRAs or 401(k)s. When asked at an April 27 press conference whether the Trump plan protected tax breaks for 401(k)s, Press Secretary Sean Spicer would not confirm. However, administration officials quickly voiced support for keeping current 401(k) rules in place for now, even though the one-page plan they released does not mention any such protection.
With IRAs, things become even murkier because in addressing Spicer’s comments, administration officials specified that contributions to 401(k)s are not deductions and would therefore be protected. However, IRA contributions are deductions because they are contributed after income is received. The Trump tax plan does not specifically protect deductions for IRA contributions the way it does for deductions for home ownership and charitable contributions.
The administration has expressed support for retirement plans. However, there are concerns about potential large deficits due to the tax breaks. This may result in Congress looking to raise revenues by eliminating or reducing retirement plan benefits at some point in the future. It is too soon to say for sure, but it would not be inconceivable to think that benefits like the stretch IRA or cost of living adjustments to retirement plans could find themselves on the chopping block for budget purposes during a late-night legislative session in Congress.
Roth IRA Tax Planning -The Trump tax plan, if it becomes a reality, will change the tax landscape for many individuals. Many may end up in lower tax brackets. This may be a good time to take advantage of being in a lower tax bracket, and convert pre-tax accounts to Roth accounts. This may be especially true if those predicting deficits as a result of the tax cuts turn out to be right. At some point, taxes will have to be raised to pay the bills, and having a Roth account that has already been taxed at lower rates will be a smart move.