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.

Yahoo finance in US news

Crude Oil Price Hits Three-Year High of $69  

Ejiofor Alike   

Crude oil prices hit new multi-year highs yesterday as production cuts led by the Organisation of Petroleum Exporting Countries (OPEC) and healthy demand helped to balance the market, but analysts warned of possible overheating.

Reuters reported that a broad, global market rally, including stocks, has also been fuelling investment in crude oil futures.

U.S. West Texas Intermediate (WTI) crude futures rose to $63.67, the highest since December 9, 2014, before settling at $63.60 a barrel.

Brent crude futures also hit $69.37, the highest since May 2015 before closing at $69.33 a barrel.

OPEC, together with Russia and a group of other producers, last November extended an output-cutting deal to cover all of 2018.

The cuts were aimed at reducing a global supply overhang that had dogged oil markets since 2014.

OPEC is cutting output by even more than it promised and the restraint is reducing oil stocks globally, a trend most visible in the U.S., the world’s largest and most transparent oil market.

The cartel had at its November 30, 2017 meeting agreed to extend oil output cuts until the end of 2018 as part of the global efforts to eliminate excess oil supply in the international market.

The current deal, under which OPEC and non-OPEC producers are cutting supply by about 1.8 million barrels per day (bpd) in an effort to boost oil prices, expires in March 2018.

The decision to extend the production cuts saw crude oil prices rising, with the global benchmark Brent trading at over $69 per barrel yesterday.

However, a major factor countering efforts by OPEC and Russia to prop up prices is U.S. oil production, which has soared more than 16 per cent since mid-2016 and is fast approaching 10 million bpd.

Only OPEC kingpin Saudi Arabia and Russia produce more.

With oil prices rising above $60, Russia had expressed concern that an extension of the cuts for the whole of 2018 could prompt a spike in crude production in the U.S., which is not participating in the deal.

Russia needs much lower oil prices to balance its budget than OPEC’s leader Saudi Arabia, which is preparing a stock market listing for national energy giant Aramco this year and would hence benefit from pricier crude.

However, some in the producers’ group fear current price gains could prompt shale companies to flood the market.

U.S. crude oil production is expected to hit 10 million bpd next month, leaving only Russia and Saudi Arabia at higher levels.

American Petroleum Institute data on Tuesday showed U.S. crude inventories falling by 11.2 million barrels in the week leading to January 5.

Additionally, the U.S. Energy Information Administration (EIA) raised its 2018 world oil demand growth forecast by 100,000 bpd from its previous estimate.

Oil prices have risen more than 13 per cent since early December, and there are indications of overheating. Analysts warned that the market is ignoring U.S. production increases at its peril.

Meanwhile, some of the world’s largest listed energy companies are facing a lawsuit for “billions of dollars” after New York City accused them of contributing to climate change.

The city also said it would start analysing ways to divest its pension funds, which have $189 billion in assets, of fossil fuel companies “in a responsible way that is fully consistent with fiduciary obligations”.

New York City mayor, Mr. Bill de Blasio, said the city was seeking damages from BP, Chevron, ConocoPhillips, ExxonMobil and Royal Dutch Shell to “protect New Yorkers from the effects of climate change”, according to the Financial Times.

“We’re bringing the fight against climate change straight to the fossil fuel companies that knew about its effects and intentionally misled the public to protect their profits,” said de Blasio.

“As climate change continues to worsen, it’s up to the fossil fuel companies whose greed put us in this position to shoulder the cost of making New York safer and more resilient.”

The lawsuit adds to the pressure on the fossil fuel companies, which are already under scrutiny from investors about the impact of climate policies on their future earnings.

The same five companies are fighting court cases in California brought by cities and counties over the harm they expect to suffer from climate change.

Exxon in a court filing this week described those actions as “abusive law enforcement tactics and litigation” that were attempting to stifle the company’s right to “participate in the national dialogue about climate change and climate policy”.

The New York mayor’s office accused the energy companies of being aware of the effects that burning fossil fuels would have on the planet’s atmosphere, citing “recently uncovered documents”.

“They deliberately engaged in a campaign of deception and denial about global warming and its impacts, even while profiting from the sale of fossil fuels and protecting their own assets from the effects of rising seas and a changing climate,” the city said.

Exxon claims that the campaign arguing that it understood the risks of climate change in private while minimising them in public was “a complete fabrication that was conceived, paid for, and executed by anti-oil and gas activists”.

It said reporting on the issue had “cherry-picked statements from company officials and misrepresented the context of other events and statements, giving an incorrect impression about our  corporation’s approach to climate change”.

Shell, which has said it was setting its strategy for a world of tightening constraints on fossil fuel use, said in a statement: “We believe climate change is a complex societal challenge that should be addressed through sound government policy and cultural change to drive low-carbon choices for businesses and consumers, not by the courts.”

Conoco and BP declined to comment on the action.

In the wake of the Paris agreement to limit global warming and weather events such as superstorm Sandy, governments globally have focused heavily on tackling climate change.

President Donald Trump, however, has pulled the U.S. out of the Paris agreement.

Pension funds globally have increasingly begun pulling out of fossil fuel companies over concerns about their impact on climate change and fears that they could become “stranded” — or worthless — if governments across the world introduce stricter rules to tackle global warming.

Mr. de Blasio and comptroller Scott Stringer will submit a “joint resolution to pension fund trustees” to begin the process of divesting.

New York City’s five pension funds hold $5 billion in the securities of over 190 fossil fuel companies.

Culled from Thisday

The Ugly Truth About Retirement Savings Shortfalls

Brian O'Connell

U.S.News & World ReportJanuary 8, 2018

A new study notes the U.S. retirement savings shortfall is worse than even the most pessimistic onlookers may think.

The upshot is that Americans will be getting less out of their 401(k)s and IRAs than they think. A lot less.

The study by the National Institute on Retirement Security, using data from the U.S. Federal Reserve, shows that retirement savings "are dangerously low" and that the U.S. retirement savings deficit is between $6.8 and $14 trillion.

Worse, the median retirement account balance is $3,000 for all working-age households and $12,000 for near-retirement households, the study reports.

What, exactly is going on with Americans and poor retirement savings habits? More importantly, what can be done -- finally -- to solve the problem of barebones bank accounts in retirement?

"If Americans continue to ignore their future, I anticipate a serious retirement train wreck in 20 to 30 years," says John Brandy, founder of Open Mind Generations, in Redmond, Washington.

The typical savings rate for most people is somewhere around 1 to 3 percent of their annual income, and that's nowhere near enough to turn the tide on low retirement savings. However, history suggests that if we save roughly 10 percent of our incomes, we're likely to achieve many of our goals," Brandy says. "And, if we save 20 percent from gross income before health insurance and taxes, that we are likely to able to achieve most, if not all, of our financial goals."

Brandy says part of the problem is steeped deep in American culture -- and not in a good way. "It seems to be a cultural difference, as many of my customers are from Southeast Asia and they are already conditioned to save more like 30 to 50 percent of their income," he says. "My customers from Europe, Canada and the U.S., so-called westerners, tend to demonstrate that savings shortfall problem far more often."

To get back on track to more robust retirement savings, investment gurus advise focusing on what you can control, and avoid the things you can't.

"If you're overwhelmed by how much money you should have before retiring, start with your expenses," says Kevin Ward, president of Park + Elm Investment Advisors in Indianapolis. "Focus on the expenses you can control. Naturally, the less money you spend on an annual basis, the less money you'll need to retire."

It's not a matter of luck, as your expenses determine if you can truly afford retirement, Ward says. "Sure, we don't know exactly how much we'll spend on an annual basis in the future, but most of us can reduce several major expenses like housing, transportation and food, if we truly tried," he says.

[See: 13 Tips for Singles Nearing Retirement.]

One strategy Ward touts is to aim for a "basic expense target" in retirement that can be calculated based on your individual needs. "Simply multiply your current gross pay by 80 percent," he says. "This is a reliable factor for retirement spending, even though it's not necessarily perfect. But a comfortable retirement can be expected at this spending rate."

If you don't start accelerating your long-term savings and investment plan, you're going to have to dial down your retirement expectations in retirement, experts say.

"Most people have not saved enough," says Robert Riordan, a certified public accountant in Columbia, South Carolina. "But they don't realize they're going to have to reduce their standard of living by about 50 percent in retirement, and they're going have to reduce their expenses down because they're going to be on a budget in retirement."

Factor in additional needs like health care and a six-month rainy-day fund, and Americans who have not saved enough for retirement, for whatever reason, are in for a serious reality check, Riordan says.

If you're in the position of not having nearly enough saved for retirement, the one sure first step you can take is to talk to a financial advisor who can create a savings blueprint -- with accountability -- that can get you going in the right direction.

"The key is to plan responsibly using a properly qualified financial planner or advisor," says Rob Drury, executive director at the Texas-based Association of Christian Financial Advisors. "Most advisors will perform basic planning functions at little or no cost.

Culled from Yahoo finance  in US news