Although the Tax Cuts and Jobs Act brought sweeping changes to the U.S. tax code, it largely preserved the favorable tax treatment and contribution limits for 401(k)s, IRAs, and other retirement plans.
That said, the new law includes several tweaks and changes that may affect your retirement savings, says Travis Huber, IRA Product Manager for Wells Fargo Advisors, making it especially important to review your plans sooner rather than later. Here, Huber shares some of those changes and the strategies to consider discussing for each.
1. No more Roth IRA conversion “do-overs.”
This could be a great year to convert a traditional IRA to a Roth IRA—the lower marginal income tax rates make the conversion less expensive for most people. And Roth IRAs provide a great benefit in retirement: tax-free income. However, there’s one important change to consider: The new tax law no longer allows you to recharacterize (undo) the conversion if it’s not paying off.
Previously, you could recharacterize a conversion later if you determined you could not afford the taxes, or the situation changed such as the value of your investments dropped sharply. “There’s no undo button anymore,” Huber says. “It’s now even more important to talk to your tax advisor before you complete a conversion, so you know what kind of tax impact it will have.”
2. More time to pay 401(k) loan offsets.
If you have an outstanding loan balance in your 401(k) and the plan terminates or you leave your job, the new tax law gives you more time to pay the unpaid loan amounts to another qualifying plan or IRA. Under the previous law, the deadline to roll over the offset was the 60th day after the date of the loan offset arose. Otherwise, you risked owing taxes and a 10% penalty on the money. Under the new law, however, you have until your tax-filing deadline (including extensions) to roll over into an IRA or pay the amount to another qualifying plan without penalty. Assuming of course, the plan with the outstanding loan requires the loan to be offset upon termination.
3. No more deduction for investment fees.
Under the old law, you could categorize investment expenses as miscellaneous itemized deductions as long as all of your miscellaneous expenses exceeded 2% of your adjusted gross income. As a result, many tax advisors recommended paying those fees out of pocket or from a taxable account. Now, you may want to talk to your tax advisor about the pros and cons of paying traditional IRA fees directly from your traditional IRA with pretax money.