How will tax reform affect your financial plans?

Doug Falkinburg, March 27, 2019

One year ago, the Tax Cuts and Jobs Act (TCJA) went into effect. These tax law changes not only affect your tax return, but they can have a big impact on your financial plan as well. Read on as we review key areas that may be impacted by the new tax laws and offer strategic insights for re-evaluating your financial plan. Individual tax and financial circumstances and outcomes may vary and you should consult with your tax and financial advisors before making investment decisions. 

 How will tax reform affect your financial plans

Retirement planning

New, temporary tax rates under the TCJA make it wise to review your decisions regarding whether to invest in traditional or Roth IRAs and 401(k)s. In particular, your tax rate may have decreased, resulting in less benefit from a current tax deduction associated with a deductible IRA or 401(k) contribution. It might be more advantageous to shift your current contributions to a Roth account and forego the current tax deduction in order in order to take advantage of the tax-free retirement withdrawals that a Roth provides.

 

Similarly, it’s advisable to review the calculations involved in converting a traditional IRA to a Roth IRA. The current low tax rates may make a conversion more favorable than it might have been in prior years. In reviewing the decision, it’s worth noting that you can no longer recharacterize a Roth IRA conversion and switch the funds back to a traditional IRA if the account loses value.

 

Itemized deductions

The decision to itemize, or not, can affect certain financial choices beyond filing your tax return. For instance, the loan limit on mortgage interest deductions is now $750,000 rather than $1 million. This could impact planning that involved paying cash, financing or paying off your mortgage early.

 

In addition, with the higher standard deduction, many people are investigating donor-advised funds as a way to maximize the potential tax benefits of charitable giving. With this strategy, rather than making smaller donations over several years and remaining under the standard deduction threshold, you would establish the fund with a large upfront sum that pushes you above the standard deduction for that year. This would affect your cash flow funding and necessitate a review of your plan.

 

529 plans

Under the TCJA, 529 plan funds can now be used for K-12 tuition expenses, up to $10,000 annually per beneficiary. While this can be useful, make sure you don’t undermine your long-term plans to cover short-term needs. If you aren’t making additional contributions to accommodate grade school costs, then removing savings for that need reduces what’s left to cover college expenses. In addition, by reducing the amount in your plan, you won’t reap the full benefit of years of compounding. Make sure your planning related to education is up to date if you want to take advantage of the more liberal distribution rules afforded by TCJA.

 

Estate planning

The TCJA may also impacted estate planning within your financial plan. The current estate tax exemption is increased to $11.4 million per person — but again, it is only temporary. Regardless of the exact value of your estate, your documents should be reviewed in light of the change. It is desirable for the wording to be flexible enough to still meet your goals and produce a favorable estate and income tax result. This is an opportune time to reassess the use of valuation discounts and the benefits of lifetime gifting.

 

Re-assess for success

Whether or not these specific points apply to you, the many changes wrought by the TCJA make it prudent to step back and re-assess your financial plan. Your Private Banker can help with this task. Together, we can ensure you’re making the best decisions for the current environment and staying on track to meet your goals.

 

Talk to a Private Banker

 

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