7 ways the Tax Cuts and Jobs Act could impact retired investors
A great deal has changed under the recent Tax Cuts and Jobs Act. Many changes may be for the better, some for the worse, and some hardly noticeable at all. What matters is that saving and investing during retirement has changed. Understanding the new tax landscape could allow you to continue your retirement comfortably with the goal of safeguarding your wealth for your family. These changes could especially impact the way retired investors are taxed, and what that means for their estate planning.
Simplified tax brackets
Thanks to the simplification of the 2018 tax brackets, most people will pay less in federal income taxes. The lowest federal income tax bracket is now 12% instead of last year’s 15%. The highest bracket is now 37% instead of 39.6%. For most, this simply means more money in your pocket, whether you make $20,000 a year in wages or $5,000,000 in mortgage bonds.
Perhaps the most significant change for wealthy retirees is the modification made to the Estate Tax. An Estate Tax is a tax levied on a person’s inheritance, taken during the transfer of wealth from the deceased to the living.
The Tax Cuts and Jobs Act temporarily doubles the exemption from $5.49 million to approximately $11.18 million per person. This exemption will be active between 2018 and 2025, reverting again in 2026 barring additional changes to the tax code. So, for the next seven years, those whose estates that are valued up to $11.18 million, $22.36 million per married couple, will not face any sort of Estate Tax. Ultimately, the number of taxable estates a given year is projected to drop from 5,000 to 1,800.
Similar to the Estate Tax, the Gift Tax has also been modified, as they are linked in the tax code. The same exemption applies, meaning that a person can give a gift worth up to $11.18 million. Gifts can be used as leverage to support life insurance funding.
Individual Retirement Accounts
Your IRA is also affected by the new tax code. Specifically, Roth IRAs are now a more appealing option because of the lower tax rate—meaning the net cost to contribute to them is lower for many taxpayers. So, if you are paying 22% rather than 25% on the money you contribute to your Roth IRA, it costs you less. Qualified distributions from a Roth IRA are income tax-free when you retire.
These changes also have an effect on life insurance, though it was not legislated directly. The most significant of these changes are the Estate and Gift Tax. Reductions on the Estate Tax allow retirees to transfer wealth to their heirs without losing very much to federal estate taxation.
Because $11.18 million (single) or $22.36 million (married) can now be transferred without being affected by federal estate taxes, some life insurance policyholders may choose to reduce their insurance policies. Another option available if you don’t need that old life insurance policy, you might be able to sell it in a life settlement for potentially more money than your cash value.
The new tax law can be fairly complicated, and it takes a great deal of time and energy to plan accordingly. One of the best things you can do during your retirement is consulted with professionals to create and maintain your retirement investments. After all, it wouldn’t really be retired if all you did was worry about navigating the large and growing tax code!
To learn more about how to invest wisely in retirement, come to one of our upcoming dinner workshops at Ruth’s Chris or Abe & Louie’s steakhouse in Boca Raton or Fort Lauderdale. Call 1-800-807-5558 for details or to RSVP.
Craig Kirsner, MBA, is a nationally-recognized Author, Speaker, and Retirement Planner, whom you may have seen on Kiplinger, CBS, ABC, NBC, Fox, Fidelity.com, MSN Money, Yahoo Finance, and others. Craig is the author of Retire With Confidence: Preserve and Protect Your Wealth And Leave A Legacy and is the creator of the Preserve and Protect Retirement System.
Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and Stuart Estate Planning Wealth Advisors have not affiliated companies. Stuart Estate Planning Wealth Advisors is an independent financial services firm that creates retirement strategies using a variety of investment and insurance products. Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Any references to safety and security generally refer to fixed insurance products, never securities or investment products. Insurance and annuity product guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Stuart Estate Planning Wealth Advisors is not affiliated with the US government or any governmental agency. 684640