Should Tax Reform Change How You Save for Retirement?

Maryalene LaPonsie

It's the most sweeping tax reform enacted in decades, but don't expect the Tax Cuts and Jobs Act to significantly change how you save for retirement.

"I don't know that it fundamentally changes the advice we give," says David Brinkman, an investment relationship manager for Schneider Downs Wealth Management Advisors in Columbus, Ohio.

However, that doesn't mean the law won't have any effect. In particular, those planning to convert money from a traditional to a Roth account should carefully consider the tax implications. For everyone else, it could be wise to increase savings in the coming years to guard against rising health care costs and to take advantage of temporarily lowered tax brackets.

Roth conversions: No more option to undo. The tax reform law largely leaves retirement savings vehicles untouched. The tweaks to retirement savings rules include a provision to provide a longer payback period for 401(k) loans after employment ends and a change to the Roth conversion rules.

IRAs and 401(k)s are available in two versions: traditional and Roth. Traditional accounts provide an immediate tax deduction on eligible contributions. Withdrawals made in retirement are then subject to income tax. Contributions to Roth accounts are not deductible, but withdrawals after age 59 1/2 are typically tax-free.

When Roth accounts were created in 1997, the government provided a way for people to move money from a traditional retirement account to the newer Roth option. Those who have traditional accounts can convert money to a Roth account by paying income tax on the converted amount.

"The old best practice was to do the conversion early in the year," says Jamie Hopkins, co-director of the retirement income program at The American College of Financial Services. That would give investors another year of tax-free gains. If the market didn't do well or if a person's income pushed them into a higher than expected tax bracket, they could always undo -- or recharacterize -- the conversion.

However, under the Tax Cuts and Jobs Act, recharacterizations will no longer be allowed. That means those looking to convert their retirement savings may want to change the timing of when they move their money.

Changes to senior programs may be looming. Although the tax reform bill doesn't have any other direct impact on retirement savings vehicles, some finance experts say there could be indirect effects.

Matt Fellowes, founder and CEO of online financial advisory firm United Income, points to the $1.5 billion the tax reform bill is expected to add to the U.S. deficit over the next decade, according to the Congressional Budget Office. In order to address that deficit, Fellowes thinks government health care spending might be on the chopping block. "Medicare [and] Medicaid seem pretty ripe for cuts," he says. "People should save more in anticipation of having to pay more for health care."

Both House Speaker Paul Ryan and Sen. Marco Rubio have made public comments about the need to reform entitlement programs such as Medicare and Social Security. However, some predict Social Security should be safe for now. "I don't expect Social Security reform before the election in 2018," Hopkins says. He estimates it could be some time before any meaningful reform is made to that system, which is expected to see its trust fund run out of money in 2034. "There aren't a whole lot of good examples of the government fixing something 15 years before it breaks," he says.

Best advice: Use tax-favored accounts to the fullest. Brinkman says concern over changing tax laws shouldn't dictate how people fundamentally approach their retirement savings. "No one knows what future tax rates might hold," he notes. Rather than try to anticipate changes, workers should focus on sticking to their established retirement plan.

"The chorus has been singing for a long time that people should be saving more for retirement," Fellowes says. He adds that seniors shouldn't count on their home to carry them through retirement either. Deductions for state and local taxes and mortgage interest are now limited, which could cool off the real estate market. "Depend less on housing for your retirement," says Fellowes, who doesn't expect properties to appreciate at the same rate as they have in the past.

Instead, the best way to save for retirement in the wake of tax reform is to maximize savings in accounts with guaranteed tax advantages, such as 401(k)s and IRAs. What's more, the Tax Cuts and Jobs Act lowers tax brackets for the next five years, meaning it might make sense for more taxpayers to shift their savings to Roth accounts in the near future.

Although there is no guarantee changes won't eventually be made to diminish the tax benefits of Roth 401(k)s and IRAs, Fellowes feels confident current accounts will be grandfathered should that happen. That means workers shouldn't be afraid to use those accounts to their fullest. However, talk to a tax or finance professional for personalized advice on how best to save for retirement and minimize taxes.

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