How Will Tax Reform Affect Your Retirement?

Category: Financial and taxes in retirement

Update Dec 2, 2017: The Senate passed their tax proposal early this morning. It is anticipated that the reconciliation between the Senate and House versions of the bill will go smoothly and it will be signed by the President soon. As soon as the final details emerge we will either update this article or create a new one, so that you can see how tax reform might affect your retirement.
November 23, 2017 — Recently we had some Comments made to other posts that touched on how the proposed tax bills approved by the House and being considered by the Senate might affect retirees. While the bills and different how they might be reconciled in the end is very fluid, it is worth considering how they impact your retirement. Just about everyone agrees that the concept of simplifying our overly complex tax code is a good thing in principle. But it also certain that any tax reform always produces winners and losers. In this article we will give our opinions on how different groups of retirees would fare on tax reform. Let us hope for your sake you are among the winners!

Tax Reform and Roth Conversions
Here is the Comment by Peder: “If the tax reform/cut/whatever gets through and they raise the 25% bracket all the way to $200K, I’m seriously going to consider converting my IRA to a Roth before I need to make RMDs (Required Minimum Distributions). Would be nice not to need to waste my brainpower managing their cut anymore!” Louise then responded wondering if there was an article explaining the tax reform/cut on how it will affect RMD’s.

Regular 401(k)s vs. Roth IRAs
Peder’s comment is interesting. Here is a little background. Money you have in your 401(k)/IRAs has to start coming out in the form of Required Minimum Distributions (RMDs) the year you turn 70 1/2. The percent you have to take out starts small (a little over 3%) and gets higher as you get older. All of that money is taxable when it comes out, in exchange for your contributions being tax deductible, and because your earnings over time were not taxed. Roth IRAs are different. These contributions to your retirement are made after tax, and are not deductible. But their advantage is that you are not required to take any money out of these accounts, and your contributions and earnings are not taxable (if you wait until retirement age).

Many financial advisors urge their clients to convert some or all of their 401 (k) accounts to Roths, if they can meet the requirements. The reason is that Roth contributions and earnings are not taxed when they come back out, and there are no RMDs. The kicker is what Peder was speculating on – if you can convert your regular 401(k)s when your tax rate is lower, it makes a big difference. The amount you convert, combined with your other earnings, could throw you into a high tax bracket. But, if tax reform lowers the rate you have to pay, the conversion might be a better deal.

Fairly small bracket changes coming
Compared to the possible 15% tax cut for corporations, the tax bracket changes for individuals proposed by the House and Senate are not earthshaking. At the luckiest you might see a 2 or 3% decrease in your tax rate, although taxpayers with a current 33% rate might actually go up to 35%. The House bill reduces 10 brackets to 4, while the Senate version reduces it to 7. Income thresholds for each bracket also change; where you fall into one of those brackets makes a difference. There might be many good reasons to convert to a Roth, but from what we have seen so far there is no groundbreaking news in the current tax reform to change your current strategy. That being said, since taxes on individuals are set to actually increase in 10 years, maybe this could be the best time you are going to get.

What to do
Wait and see, that is the best answer we can provide now. Nothing is final and lots could change, assuming the bills even pass. Even when you do see the final brackets and tax rates, you won’t know if converting is a good idea or not until you know exactly what your other income for the year will be. Since we are not tax experts, we look forward to comments from knowledgeable people on this topic.

Other winners and losers
Recognizing again that the current tax bills might never actually become law, or that if they do they might be quite different than they are now, here are some thoughts on how the current proposals produce winners and losers among the retirement age population.

Where you live
The state in which you live has a lot to do with how the current tax reform proposals affect you. If you live in a red state with low property taxes and state income taxes, tax reform as it proposed is OK, maybe even good. However if you are from a high tax blue state like California, New Jersey, New York, or Pennsylvania – you could get hit hard and be part of the loser group. That’s because the bills propose eliminating state income taxes as a deduction, and either eliminating or greatly reducing property tax exemptions.

Do you have a big mortgage?
Normally retirees don’t have a big mortgage. But if you do, one of the proposals is to eliminate the deduction on home mortgages greater than $500,000. That could hurt and put you in the loser group.

Real estate dislocations
Many trade groups are opposed to the proposed tax reform bills because they think it is going to hurt the real estate market. Here is what the National Association of Realtors says about it on their website: “The Tax Cut and Jobs Act threatens homeowners with a loss of tax incentives and a reduction in home values. Eliminating the state and local property tax deduction and changes to the capital gains exemption will increase taxes now and when a home is sold.” The net effect might be to reduce home values, particularly in high tax states.

Health Insurance
The Senate version of tax reform would eliminate the individual mandate part of the Affordable Care Act (Obamacare). While this would help younger people who feel they don’t need health insurance, this provision would be a crippling blow for Americans over 50 who have to buy their own insurance and make more than $48,000/year. Insurance rates will go up without healthy young people included in the mix, and those who can’t qualify for a subsidy will either be priced out of the market, or devote a large portion of their disposable income to health insurance. It is estimated this provision would cause 13 million people to become uninsured, many of those would be older Americans who pay for health insurance and don’t qualify for subsidies.
Medicare cuts
According to the Congressional Budget Office (CBO) the proposed tax reform bill could force $25 billion in cuts to Medicare for 2018. If you are part of Medicare, this puts you in the losers column.

Do you have a lot of medical expenses?
The AARP estimates that 1.2 million Americans over 65 could see their taxes actually go up in 2018 with tax reform. That is because of the elimination of medical expense deductions, which a surprising number of older Americans take, and the deduction for being over 65.

Have an estate worth more than $11 million (couple)?
The proposed elimination of the estate tax would affect an estimated 5,500 estates a year, or about 2 out of every 1,000 Americans who die. If you are one of those or one of the 80 family owned farms or businesses a year that would now escape the estate tax, you are a winner (well at least your heirs are!).

Do you own a lot of stock or are you very wealthy?
You might be a winner, because the big proposed cuts to corporations will probably mean stock prices will go up along with dividends. And they are likely to stay high, because unlike the proposed tax cuts for individuals, which will actually increase in 10 years, the corporate tax cuts would be permanent. Tax cuts for the very wealthy are very generous; not so much for those in the middle or the bottom.

Bottom line
Who knows if tax reform will pass or not. Republicans desperately need a win, and that could propel one of these bills over the finish line. Viewed from the lens of someone over 65, tax reform as currently proposed doesn’t look like a good thing to us. However you see it, it is time to let your elected representatives know you feel.


For more on the brackets and Senate tax bill

Overview of the Senate tax bill – Tax Foundation
Roth IRAs (Investopedia)

Posted by Admin on November 23rd, 2017

37 Comments

  1. I would be interested in seeing some examples of Tax Reform and how converting IRA’s to Roth will save money. Can someone provide hypothetical examples?

    by Louise — November 24, 2017

  2. I’m a way from putting my money where my mouth is, just turning 65 and needing to stay below the 400% poverty cap this year to retain my Obamacare subsidy, but having built up a substantial pretax IRA between contributions since my 20’s and subsequent 401k and profit-sharing rollovers, I’m seriously thinking of starting Roth conversion if the the 25% tax bracket is raised to $150,000 or so next year. Granted, I’ll need to tap taxable investments to pay the taxes, but those have grown as well and what better way to pay your taxes than with other people’s money? A sizable chunk of the IRA is the government’s already and they just let you fret about it while they patiently wait to collect. Even if I waited to make RMDs after 70 (and I agree the percentages required are low), were I to pass on, my heirs would still have to clear it out within 5 years and it’s likely a joint income plus the inherited IRA would push them into a substantially higher bracket. There are other variables to consider, such as increased Medicare premiums, tax on SS if taken (though today I’m thinking about waiting until 70), other investment income, etc., but I’m currently look for the perfect conversion calculator. Regardless, I don’t plan on tackling this without professional support from my tax pro.

    by Peder — November 24, 2017

  3. Peder, I have an inherited IRA and have been collecting on it for 5 years and plan to keep taking RMD’s for my lifetime. I used the RMD calculator and the money runs out at approx. age 84 which is 20 years from now. https://www.forbes.com/sites/deborahljacobs/2013/05/01/inherited-ira-rules-what-you-need-to-know/#6c66960e3cfe

    by Louise — November 24, 2017

  4. There may be an opportunity for taxpayers with a high non-deductable proportion of their aggregate IRA balances to convert to Roth at a lower tax cost.

    An oversimplified example:
    – IRA Basis (Form 8606 Pt. I, Line 3) of $20,000
    – IRA total value (Form 8606 Pt. I, Line 6) of $40,000

    In this example one could convert $40,000 from traditional to Roth and only pay tax on $20,000 because the taxes are already paid on the $20,000 in basis. The biggest benefit is that future ROTH IRA earnings will NEVER be taxed. Left in the traditional IRA all future earnings will be taxed eventually when distributed.

    Issues to watch related to tax reform are:
    1). Rates may soon be lower thus even more attractive after effective date.
    2). ROTH conversion rules and limitations could change which might mean the opportunity may go away on the effective date.

    Caution: consider all IRA, including rollovers when completing Form 8606.

    by SSmith — November 24, 2017

  5. Louise – Thanks for the info. I did not realize that heirs could also choose RMDs rather than lump sum. I thought the IRS’s goal was to get that money back into the taxable theater ASAP. Another lessons learned.

    by Peder — November 25, 2017

  6. Peder, the way the laws keep changing, I wouldn’t doubt they will try to take inherited IRA’s away from those who inherited them. The lawmakers will not be happy till they take everything away from us and we all live under a bridge in a cardboard box. They will then tax the cardboard box. They don’t want us to depend on Government programs but then talk about reducing the 401K contributions. I no longer work or contribute to a 401K but if not for that savings program, I wouldn’t have been able to retire.

    by Louise — November 25, 2017

  7. Louise, I always appreciate your comments. I do take issue with your statement that “lawmakers” won’t be happy until they take everything away from us. Many lawmakers (mostly from one of the two parties) are working hard to make sure Social security and Medicare is NOT cut, and that in fact these programs begin to provide more benefits. The recent proposals to decrease the tax-free amounts that can be put into IRAs and 401k’s came from just one party. Many lawmakers are actually working hard to protect retirees and those preparing for retirement. We need to read, study and learn who they are. Then vote accordingly.

    by Clyde — November 25, 2017

  8. Clyde, Every day I listen to the news and it seems it is doom and gloom for Social Security, Medicare, Medicaid and now Welfare. I know there are those who are fighting to keep Social Security and Medicare protected but the lawmakers keep enacting laws that keep chipping at Medicare little by little. Increasing the age for full retirement benefits, taking away certain things like file and suspend. They also plan to do away with Plan F Medigap that pays the Plan B deductible 100% because they say they want plan recipients ‘to have more skin in the game’. Those who have it before 2020 can keep it and are grandfathered. Seems there are other areas of the government that could be investigated for cuts. Like the scandal with Health and Human Services Secretary who spent around 1 million dollars flying on Private jets and Military planes. He is gone now but that is just one example of where money should never have been spent so recklessly. The thing you mention is to read, study and learn who they are is how it should be but many of them will say all the things we want to hear while campaigning but as soon as they are in office do just the opposite.
    https://www.nytimes.com/2017/11/15/us/politics/republicans-entitlement-programs-deficit.html

    by Louise — November 25, 2017

  9. Editor comment: Just to let everyone know, we have just updated this article to include our take on how the current tax reform bill creates winners and losers among the retirement age population on a variety of topics. Those include health insurance, where you live, medical expenses, etc.

    by Admin — November 25, 2017

  10. Seniors might be hurt if they life in a high income state and with medical deductions maybe going away, but that only applies if they itemize those deductions. So AARP’s numbers would be correct, but they didn’t say that only about a third of people itemize their federal taxes. You will need to look closely if itemizing will be beneficial or taking the standard deduction, which are proposed to go up.
    As I have read many times in these blogs, state taxes and property taxes are just one of the main drivers in a possible move to a different state. I for one will be leaving Minnesota a high tax state which also taxes SS to Arizona which will be about 2.5% less in state tax rate and don’t tax SS, plus much lower property taxes. I lived in Tennessee for 14 years and loved not having state income tax.

    Editor comment: Just to clarify, TN doesn’t have an income tax as Bruce states, but it does tax interest and dividends. All in all, more tax-friendly than most!

    by Bruce — November 26, 2017

  11. About the state of Tennessee income tax, it does tax certain interest and dividends and is known as the “Hall Tax”, however Tennessee is eliminating this tax at 1% per year going forward and in 2018 it will be a 4% rate, 3% in 2019, etc. until it is totally eliminated.

    by Peter — November 29, 2017

  12. The tax plan is not getting good reviews. See http://www.businessinsider.com/trump-gop-tax-reform-bill-analysis-reviews-text-2017-11 , http://thehill.com/policy/finance/362416-aarp-52-million-seniors-would-see-taxes-increased-by-gop-bill , and the CBO report https://www.cbo.gov/publication/53349.

    by Sheila Beaudry — November 29, 2017

  13. And this:
    http://thehill.com/homenews/administration/362522-analysis-mnuchin-promised-showing-tax-cuts-pay-for-themselves-doesnt
    and this:
    http://thehill.com/policy/finance/362412-cisco-pfizer-coca-cola-plan-to-turn-over-gains-from-proposed-tax-cuts-to

    Good new for some, but not most… Oh well, not everyone can be rich. Suckers.

    by Peder — November 30, 2017

  14. For those seniors that have brokerage accounts with stocks (that you bought way back when and that you have bought and sold along the way in small quantities of shares, as many individual investors do when their accounts are modest in size with expensive dividend stocks), there is another nightmare awaiting when they discover that they can no longer, by the new tax code if passed, select which shares they want to sell off with a particular stock. The new ruling is for mandatory FIFO, meaning that if you need to sell some of the stock that you maybe bought in the last year or two that is part of a position that you started to accumulate 30 years ago and which has been accumulating and growing all those years, now your going to have to pay taxes using the FIFO rule–first in, first out. Those shares taxed will be the shares you first bought at the earliest time, years ago, that you still own. Those have appreciated greatly and will pad the government coffers with much more tax than if you sold that last 200 shares you just bought a little while ago that is tanking. Many are unaware that this is in the new Senate version, the government and the mutual funds expect a windfall from it as investors discover their future tax bills, as it is a stealth tax on capital gains you have held and accumulated over a long time if you are an individual investors. They have exempted mutual funds, institutional investors and RICs from this new law, which means they have singled out the retirees and individual investors making their living off their investing which in my thoughts is groosly unfail treatment if not downright discriminatory. And of course it is more expensive to invest in funds than it is to buy individual stocks so that is another expense for those who choose to move their investments to mutual funds with their high expenses. I have not yet found out any more details, ie whether REITS and MLPs are also affected for the individual investors. But those with taxable accounts who are unaware that this is included in the bill may be very unhappy with their next tax bill in a year or two.

    by Khem — December 2, 2017

  15. Great reason vote out all GOzp congressmen supporting this horrible bill

    by Ron — December 3, 2017

  16. I don’t like to get political on this forum but Congress is who decides our future…so thank you Ron, I wholeheartedly agree as does AARP, who said that the recently passed tax “reform” bill, if implemented will hurt seniors and many will lose necessary health care, particularly cancer treatment.

    by readingfam — December 3, 2017

  17. I’m gonna need a bigger postcard… :/

    by Peder — December 4, 2017

  18. Let’s just hope they don’t start making cuts to Medicare and SS to pay for this so called “tax reform bill”.

    by Jim C — December 4, 2017

  19. Unfortunately, Jim C, that is probably next on the agenda. From Rubio, “We have to generate economic growth which generates revenue, while reducing spending. That will mean instituting structural changes to Social Security and Medicare for the future”.
    Instituting structural changes=cuts
    https://www.fa-mag.com/news/rubio–offset-tax-cuts-by-reducing-social-security–medicare-benefits-35928.html

    by Kay — December 4, 2017

  20. Jim, Kay, that’s exactly what’s going to happen. I think it was an underlying motivation all along
    .

    by readingfam — December 4, 2017

  21. Well, the last CBO projections are for social security to be insolvent in 2024 (not enough funding to cover payouts) and Medicare in 2029. Medicare mandatory spending cuts starting in 2021 (IPAB process, if you want to research). So some cuts will occur, if not soon then more later.

    Regarding tax reform bills, the average middle income tax form will see a greater than 20% reduction and the average high income tax form less than 10% reduction. Thus the income tax system will be even more progressive than it is now.

    Of course the $ amount of reduction is higher for higher income because of the much larger $ amount of tax paid. This fact has been seized on by agenda driven media sources to drive negative emotions.

    The political progressives should support any change that makes the tax system more progressive but logic and reason seems to have been abandoned as a viable way of thinking nowadays.

    by Tom B — December 5, 2017

  22. A Republican tax plan that benefits average and lower income people over corporations and high income earners? Not bloody likely.

    by JCarol — December 5, 2017

  23. Well in our case my federal tax rate goes from 28% to 22%. If they take the deduction away for high state and local taxes oh well. We will be leaving Minnesota for Arizona and we will save another 2.5% in state tax rates. It may even make sense to take the standard deduction and not itemize, but will need to see the final bill to make that decision.

    by Bruce — December 5, 2017

  24. There is a lot of misinformation being spread for political reasons. In my circumstance the Senate Tax Bill would benefit me. I dare say that most seniors would benefit under the bill. Ofr one thing, the medical expense deduction threshold would be lowered to Pre-Obama rates. The ACA raised the theeshold and funded the program on the backs of the chronically ill, disabled, and seniors. That was sneaky, immoral and wrong, but there was nobody speaking out against it, but Republicans and the media never covered it. Also, the standard deduction is doubled, which helps seniors who do not itemize. My rate would also go down. I live in a high income tax state, but will have to move soon anyways. I think that the Democrats have backed themselves into a corner on this one. They lied to us about the ACA and they are using scare tactics now. The numbers speak for themselves if anyone has seen the proposal.

    by Maimi — December 6, 2017

  25. The Wall St. Journal has a very cool calculator that lets you try to determine the effects of the GOP bill on your own personal taxes. There are so many moving parts to the bill that it is hard to know how you are effected. Hopefully you can use this as a guest:
    http://www.wsj.com/graphics/republican-tax-plan-calculator/

    by Admin — December 6, 2017

  26. Admin – the WSJ will not allow non-subscribers to access this, but I found a free calculator that was updated December 4th. It shows what taxes would be owed under both the Senate and the House versions of the bill.

    https://www.marketwatch.com/story/the-new-trump-tax-calculator-what-do-you-owe-2017-10-26

    by JCarol — December 6, 2017

  27. In response to Maimi —

    I don’t know where you have gotten the information that this bill helps seniors by lowering the medical deduction threshold. AARP has said that the bill “clobbers” seniors. Unless, I am completely misreading the bill, this law does away with medical expense deductions, not lower the threshold to take them. From AARP: “A coalition of advocacy, health care and civil rights groups organized by AARP has sent a letter to all members of Congress urging them to protect the medical expense deduction. “We urge Congress to restore the medical expense deduction and continue to support millions of middle class Americans with high health care costs.” If you or your spouse end up in a nursing home or with a serious illness you can no longer take that expense as a deduction. It also cuts 25 million dollars from Medicare cancer treatment reimbursement. “The bill also includes tax cuts so large that they would trigger across-the-board spending cuts — including billions for Medicare. The last time Medicare was hit with cuts like this, patients lost access to critical services like chemotherapy treatment.” (VOX) According to an article in the Washington Post, many area oncologists are already combing through their list of patients to figure out which ones they will have to stop treating. This bill is awful for middle and lower income seniors.

    by readingfam — December 6, 2017

  28. I just want to add that it is up to us as individuals to stop the spread of lies. There are NO cuts to Medicare or Medicaid in the tax proposals. MOST senior citizens will benefit from the higher personal exemption,medical expense deduction changes, and lower rates. MOST seniors do not itemize deductions, MOST seniors do not invest in the stock market as individuals.

    We can no longer afford to be lied to and follow a political party like sheep. We were lied to about the ACA. Don’t let that happen again. Read the proposals and think for yourself.

    by Maimi — December 6, 2017

  29. Maimi – Maime, please show proof, not just your opinion that medical deductions will still be allowed and made better by a lower threshold and that Medicare will not be cut.

    I have cited at least 4 articles.

    The 1.5 trillion cost triggers a reduction to Medicare This is a fact.

    The following is from Market Watch (not a liberal organization) “The tax plan that congressional Republicans and President Donald Trump are pushing may do more than cut taxes — it could also cut spending for programs including Medicare and student loans.

    Here’s why: Budgetary rules known as statutory paygo (short for pay-as-you-go) call for automatic spending cuts if Congress enacts bills that have the net effect of increasing the deficit by the end of the year.”

    Here’s how the CRFB estimates automatic cuts would affect certain mandatory programs:

    Medicare 2018 Sequester Cut $28 billion
    Program 2027 Sequester Cut $56 billion Market Watch

    The only way to avoid these cuts is by Congress acting to stop them at the end of each year…and I’m not going to drink that kool-aid.

    Please do some research and cite facts not opinion.

    by readingfam — December 6, 2017

  30. readingfam
    This was taken from the AARP letter to the Senators:

    AARP also remains committed to retention of the medical expense itemized deduction and its return to the 7.5 percent income threshold. So far from what I can see it is in the bill, but we will not know until the final version.

    Also, the 1.5 trillion you hear that will increase our the debt happens if we don’t see 4% growth in the economy. So again that is even 3% will not add that much to the debt and paygo does not get invoked.

    Plus if you have a 401k you got like the 2000 point stock market increase.

    by Bruce — December 6, 2017

  31. Bruce, regarding your comment you are spot on.
    I wish people truly understood the benefits of the
    Tax cuts especially the benefits of lowering the corporate tax rates.

    I’m in the 15% tax bracket and made more money
    In my 401k in ten months this year than I made
    The last eight years under obama. Sit back folks and let President Trump work his magic. Enjoy
    the next several years until another crooked
    politician gets back into office and we are back to the same old way of thinking!

    by Skip P — December 7, 2017

  32. Miami, Bruce & Skip P continue posting please! Our media and politicians are no longer interested in giving facts. They are working toward a different goal and it doesn’t involve the average American. Most people will not dig through the maze of the internet to get facts or broaden their range of reading.

    by C — December 7, 2017

  33. Recessions matter –
    http://www.macrotrends.net/1358/dow-jones-industrial-average-last-10-years

    by Loretta — December 7, 2017

  34. Some Senators have already said the next step is to address reductions to Social Security and Medicare to offset some of the expenses of this tax bill. This isn’t over yet.

    by Sharon Alexander — December 7, 2017

  35. Hey, you GOP people . .

    It is my understanding that as these two bills stand now, the tax CUTS for the RICH are to be SET in stone. However, the benefits to the seniors and others in the POOR PARTY category, well, those benefits are set to EXPIRE in 7 years. One thing I’m certain you can count on is this: as soon as these “benefits” are finally passed, you are going to hear a hue and cry from the oligarchs and the lobbyists who control how legislators vote, that “the deficit is out of control and we need to CUT the ENTITLEMENTS” to all the others. Shame on us all for not wanting to pay our “fair share” for roads and schools and health care for all. In my opinion, the rich get a free ride on the backs of everyone else. Always have, always will.

    by Ellen — December 7, 2017

  36. Well, Ellen, I am a Democrat and paid way more than “my fair share” all of my working life. Then, got sick and old. I was shocked and dismayed when my own party decided to pay for the ACA on the backs of the sickest of us and the disabled. I was also shocked when my insurance premiums went through the roof and my deductible became a bad joke. All this while I and millions of other Americans battled cancer,disabilities, and other illnesses. Did anyone stand up for us? No, the ultra liberal press stayed silent while many of us were put under great hardship and unable to do anything about it. I say it is not about political parties anymore.

    I don’t know what you consider rich”, but it is the few that pay the majority of taxes in this country and fund a huge percentage of the government social programs . Class warfare is gettng old. I want to see businesses hire more people and I do not begrudge anyone else’s success. I know that very few people get “ rich” without anlot of hard work!

    After the stunt my own Democrat party pulled on the American people with the ACA, I verify every word for myself and make my voice heard and I suggest that this tax reform will benefit the vast majority of Americans, including those who are still suffering from job losses under Obama.

    by Maimin — December 7, 2017

  37. Well folks I think we are getting into a back and forth and everyone making the same arguments over and over again. Both sides have made their points. So we are closing off comments for now. When the tax bill is finalized we will write a new article and then we can all discuss that! Thanks for everyone’s contributions.

    by Admin — December 7, 2017

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