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Tax Reform Shakes Up Routine EOY Retirement Planning

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Conducting an end-of-year retirement plan checkup is important every year, but some of the changes ushered in by the 2017 tax reform legislation make performing this routine evaluation even more important now that we’re quickly approaching the end of 2018.

While many basic retirement plan rules were left unchanged by the new law, in some circumstances its provisions can have both a direct and an indirect impact on many retirement-related issues. To maximize the potential tax benefits under tax reform, each client’s year-end retirement planning checkup for 2018 should include a discussion of the changes brought about by the new law, and how those changes could influence the client’s retirement planning strategy for the year.

2018 End-of-Year Checkup

Clients who are still working should be advised that maxing out pre-tax contributions to retirement plans continues to be important for 2018—in fact, with the reduction in tax rates, large pre-tax contributions can even help clients drop into a lower tax bracket, and can help small business clients qualify for the new Section 199A pass-through deduction for qualified business income. The pre-tax contribution caps remain the same for 2018–$18,500 for 401(k)s and $5,500 for IRAs, with an additional catch-up contribution of $6,000 or $1,000 for those aged 50 and up.

Clients who have reached age 70 ½ should be reminded of their required minimum distributions (RMDs) for 2018. While the RMD rules remained unchanged—clients are required to take their distribution by December 31, or April 1 if they turned 70 ½ in 2018—tax reform did impact some issues surrounding RMDs.

Clients who have just turned 70 ½ should estimate their new tax rate in determining whether it might be more advantageous to take their first RMD in 2018 (which would increase taxable income) or in 2019 (which would mean that they are required to take two RMDs in a single tax year).

Clients who typically give to charity each year might consider whether it would make more sense from a tax perspective to execute a qualified charitable distribution (QCD). Because fewer clients will itemize deductions given tax reform’s expansion of the standard deduction and limitation of several important itemized deductions, giving to charity in the traditional way will not generate any tax benefit in many cases. Clients who are already required to take RMDs might benefit from directing a portion of their RMD directly to charity, which would exclude the amount from the year’s taxable income entirely.

Considering a Roth Conversion?

As the year comes to a close and most clients are able to get a better picture of their overall income and tax rate for 2018, it becomes time to evaluate whether a Roth conversion is a smart idea for the year. This year, the calculus has changed because of several changes brought about by the 2017 tax reform legislation.

First, it is likely that many clients will find themselves in a lower-income tax bracket for 2018, as compared to 2017. Traditional IRA funds that are converted to a Roth IRA are taxed at the taxpayer’s ordinary income tax rates. Because these reduced income tax rates are only temporary—and will expire after 2025 if no action is taken to extend them—clients may wish to consider executing a series of Roth conversions over the next few years in order to take advantage of the reduced rates.

Second, clients should remember that any Roth conversions that they make are now permanent. Pre-reform, taxpayers had a window of time to evaluate whether the Roth conversion was, in fact, a smart move, and had until October 15 of the year following the conversion to recharacterize—or undo—the conversion.

This option was valuable in many cases because it allowed the client to undo the transaction if it turned out that their Roth account performed poorly—so that they were paying taxes on funds that had diminished in value—or if the client unexpectedly jumped into a higher tax bracket late in the year. Tax reform eliminated this option, so that clients no longer have the benefit of hindsight to evaluate the performance of their Roth funds.


Clients should conduct a retirement plan checkup periodically to make sure they’re making the most of these tax-preferred investment vehicles, but the analysis is particularly important this year as clients try to understand how the tax reform legislation can impact their retirement savings and planning even though many retirement-related provisions were left intact.


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