What does the new tax bill mean for Retirement Plans?

In the beginning, there were many proposed changes that would have turned the retirement plan world upside down! Including capping the pre-tax 401(k) contributions to $2,400 and any remaining contributions up to the maximum limit would be considered after tax contributions. The good news is, the new tax bill did not make any major changes directly to Retirement Plans.

Review your contributions! For the first time since 2015, the IRS announced higher elective deferral limits for group retirement plans. For 2018, the new limit increased to $18,500 while for those over age 50 or turning 50 this year the limit is $24,500. This does not include any employer contribution you may also receive. IRA limits did not change for 2018.

Review your tax bracket! With the recent passage of the Tax Cuts and Jobs Act, it’s now time to review your tax bracket and determine whether Pre-Tax or ROTH investing is most advantageous for you. There are 7 tax brackets. Generally speaking, if you’re in the lowest two brackets, then ROTH is the way to go. If you’re in the highest two, then Pre-Tax. When in the middle three, you could go with either or both. When in doubt, the thought of having no tax liability during the distribution stage sways me more towards the ROTH route.

I recently read an analogy I can’t claim as my own, but would like to share: “Would you rather pay taxes on the seed or the harvest?” The answer is obvious. Paying taxes on the seed and not on the harvest is ROTH investing.

Finally, don’t forget about the Tax Savers Credit. The new tax laws did not take away this tax advantage that rewards you for saving for your own retirement. Be sure to ask your tax advisor about filing Form 8880 if you are contributing to a retirement plan or IRA.

 

Jane Smith

First Merchants Private Wealth Advisors products are not FDIC insured, are not deposits of First Merchants Bank, are not guaranteed by any federal government agency, and may lose value. Investments are not guaranteed by First Merchants Bank and are not insured by any government agency. This material has been prepared solely for informational purposes. First Merchants shall not be liable for any errors or delays in the data or information, or for any actions taken in reliance thereon. Any views or opinions in this message are solely those of the author and do not necessarily represent those of the organization.