At first, it seemed as if people could talk about nothing but the new tax laws of 2018. Emotionally-charged rhetoric vacillated between those who swore that the tax code changes would destroy the economy and those who were sure that prosperity was just around the bend.
In particular, many feared the proposals that would have taken away the deduction for contributing to your retirement account and reduced the maximum amount you are allowed to contribute to your plan. Since these proposals are not in the law that passed, we do not have to worry about them. In fact, the new tax code has little impact on your retirement savings. Here is how the 2018 tax changes can impact your retirement planning:
You Can Save More Because of the New Lower Tax Rates – for a While
Most working Americans have a lower tax rate under the 2018 tax code changes, so they have access to more funds to put away for their retirement years. However, like so many tax code provisions, the tax rates are temporary. In 2026, the new lower rates end and we will have the previous rates – or whatever rates become law by then. Therefore, if you want to take advantage of the opportunity to contribute more money to your retirement account, now is the time.
Roth versus Traditional IRA Accounts
Because the new lower tax rates might make the deductibility of a traditional IRA less of a tax advantage than it used to be, some experts suggest that you consider putting some of your dollars into a Roth IRA. With a Roth, you do not get a tax deduction now, but when you access the funds down the road, you will not get hit with taxes on the qualified distributions.
Contribution Limits for Retirement Plans
Since the proposed limits on contributions to retirement accounts ended up on the cutting room floor and not in the final version of the new tax code, you can still make these salary deferral contributions (in 2018):
- If you have a 401(k), 403(b), Thrift Savings Plan (TSP), 457, or SARSEP, you can contribute up to $18,500 or all of your compensation, whichever number is lower. People age 50 and over can save an extra $6,000 as a catch-up contribution.
- You can contribute up to $12,500 or all of your compensation, whichever is lower, into a Simple IRA. The catch-up limit for people 50+ is $3,000.
- A SEP IRA allows you to save $55,000 or one-fourth of your compensation, whichever is lower.
- Traditional and Roth IRAs limit you to $5,500 or all of your earned income, whichever is lower, and a $1,000 catch-up maximum for people age 50 plus.
The Bottom Line
Not much changed with the new tax laws with respect to retirement plans, but you might be able to use the extra money in your pocket from the lower tax rates to shovel a little more into your retirement savings. If nothing else, taking a look at the status of your retirement savings is a useful exercise that could help you avoid an unpleasant surprise down the road.
The article is not tax or financial planning advice. You should consult with your professional advisors about any questions you may have.
USAA. “How the New Tax Law Affects Retirement Savings Strategies.” (accessed September 20, 2018) https://communities.usaa.com/t5/Financial-Advice-Blog/How-the-New-Tax-Law-Affects-Retirement-Savings-Strategies/ba-p/166445