The New Tax Law: Impact on Retirement Account Planning

The new federal tax law commonly known as the Tax Cuts and Jobs Act (TCJA) has affected many areas, including retirement plans.  Here are some of the key impacts on retirement planning:

1. No changes to stretch IRAs or elimination of traditional tax-deferred IRAs. Let’s start with some anticipated change that were not included in the TCJA. Under the so-called “stretch (or inherited)” IRA rules, if elected by them, your descendants are able to defer distributions for many years allowing them to continue to enjoy tax-deferred growth.  With a Roth IRA, that deferred growth also is tax-free. While there have been numerous rumblings that the stretch option would be eliminated or reduced to only five years, no such changes are in the TCJA. In addition, there was also chatter about ending tax-deferred contributions that reduce income (e.g., traditional IRAs) and instead expanding after-tax contributions (e.g. Roth IRAs) that offer tax-free earnings going forward. While not changes to those rules were made in the TCJA, this issue is not dead.
2. The continued viability of Qualified Charitable Distributions (QCDs). Under the TCJA, the standard deduction is doubled and many deductions are no longer viable or are limited. Many charities have been concerned that this will reduce the number of donations.  With a QCD, if you are at least age 70 ½ and funds from your IRA go directly to a qualified charity, you can use the standard deduction and still get a charitable deduction which is limited to $100,000. A QCD also  satisfies the annual required minimum distribution (RMD).
3. Undoing of Roth IRA Conversions has been eliminated. Under prior law, if you elected to convert your traditional IRA to a Roth IRA so that you could enjoy future tax-free growth, there were rules that allowed you to undo such an election within certain time lines. This was known as “recharacterization”. The TCJA has eliminated the ability to recharacterize (undo) a Roth conversion. The net effect is that the decision to make such a conversion should be done carefully with the assistance of professional advice as it will be irrevocable.
4. Medical expense exception to the ten percent penalty for early withdrawal is expanded. There has been a long standing rule penalizing early IRA withdrawals by ten percent with certain exceptions. One of those exceptions has been high medical expenses. Under the TCJA, for 2017 and 2018, if medical expenses exceed 7.5% of adjusted gross income (AGI) the taxpayer may be eligible to take a penalty-free distribution from your IRA. The penalty-free distribution is limited to the amount by which such medical expenses exceed 7.5% of AGI. Note: While most of the changes of the TCJA take effect in 2018, this one is available for 2017 tax returns.

In future articles and blogs, we will discuss other planning challenges and opportunities afforded by the TCJA.