Author: Lynn Ballou
President Trump has proposed several key tax changes that could affect the retirement outlook for savers. But the realities of Washington politics mean that any comprehensive Trump tax plan is a work in progress. Specific Trump tax policy, as well as a broader Trump economic plan, will take shape over the months ahead. Based on what we currently know about proposed Donald Trump tax rates and other Trump tax proposals, we can look at changes that warrant attention moving into 2017 and beyond, if the President’s plans come to fruition.
RETIREMENT ACCOUNTS
Let’s say you’ve invested a significant portion of your portfolio in tax-deferred IRA or 401(k) accounts. From listening to Donald Trump on taxes, you might expect lower rates ahead, and consequently a less attractive tax break from your tax deferrals. It pays to realize though, that tax laws change frequently. They’re used as political poker chips by every administration. Pay attention to the end game: allow for a potentially long life and the need to develop a well-balanced portfolio you can individually control—a portfolio that’s designed to survive the decades of whimsical congressional behavior to which we all can look forward.
Also consider the value of investing in ways that help dissuade you from spending those investments too soon. Retirement accounts typically involve penalties and taxes for using retirement assets before you retire—a compelling incentive to keep your spending plans in check and focused. Many who hold assets in accounts without such restrictions may invade those assets too soon. They risk becoming part of a less fiscally independent generation that will look to the government for support in their later years, at a time when congress is also contemplating cutting Social Security and Medicare benefits.
CAP ON ITEMIZED DEDUCTIONS
If you’re fortunate enough to rank among the highly compensated members of our society, you’re already subject to very significant caps and limitations on many itemized deductions. In fact, for the upper tiers of this group, Trump’s proposed deduction caps may make no difference at all. It’s possible though, that a different overall cap might make your charitable giving less fiscally appealing, unless you move your deductions off your Schedule A and onto the front page of your Form 1040 as an adjustment to income.
Also, it’s worth considering the potentially profound impact on real estate values that may ensue in some markets from losing the total benefit of deducting qualified home mortgage interest on loans up to $1.1 million. Anyone who is contemplating buying a home they can only afford because the interest is deductible should think twice—but the reality is that many of us often buy a bit more than we could otherwise handle without the tax benefit. Review your own unique situation and be sure you can make the payments on any house you’re considering, even with no tax break at all.
ROTH 401(k) or IRA
Regardless of possible changes in tax rates, most high earners probably are already aware that it’s time to stop growing their pre-tax assets and develop more Roth types of investments. We see a lot of our clients entering retirement with an overweight of their net worth in pre-tax assets, which is creating tax havoc in their RMD years. Way too much of their net worth goes to income taxes annually on those required—but often unneeded—distributions. In light of this reality, employers that are not already offering Roth 401(k) options to their employees should really think about adding that opportunity.
ELIMINATION OF 3.8% MEDICARE SURTAX
The removal of a 3.8% disincentive to invest may be sufficient to make wealthier investors less reticent to do deals. Putting lower brackets in place and taking surtaxes off the table could unleash a surge in capital activity, possibly boosting returns for these investors, as well as creating a tax windfall for the government.
CHANGING TAX BRACKET
It would make taxes less of a factor in certain investment decisions. If brackets become lower and the definition of short- and long-term capital gains stays the same, the spread between the tax hit on a short-term gain and a long-term gain is squeezed. This would allow investors a bit more freedom to make thoughtful portfolio and investment-allocation changes with less of a tax burden. Currently, for example, an investor holding an appreciated stock might benefit from selling it to rebalance their portfolio. But they might delay beyond the time of optimal market conditions while trying to capture the additional tax benefit of selling for long-term capital gains treatment.
LOOKING AHEAD
What should you do now, and what future actions should you consider, as Trump tax policy develops? Contact an EP Wealth Advisor to discuss creating a plan that addresses your specific financial situation and future goals in this changing economic environment.
