Broker Check
New Tax Law Data Integrated into Financial Plans

New Tax Law Data Integrated into Financial Plans

January 16, 2018

Kudos to our financial planning software provider, Right Capital.  Only 2 weeks into the year and they have managed to update the planning software with the new tax rules.

As a reminder to folks, the tax law made significant changes which will have a profound impact on some areas of your financial plan.  Here are a few examples: 

Roth IRA conversions.  The previous 10 and 15% tax bracket are being replaced with 12% and 14% brackets.  The previous 25% and 28% brackets are being replaced with a 22% and 24% bracket.  With lower marginal rates, it might make a lot more sense to convert IRA’s to Roth IRA’s – especially since these lower rates are due to expire and go back to the old higher rates in 2025.  The software is now able to model Roth conversion scenarios using the new (and expiring) tax rates. 

Charitable Planning.  With the new tax law, many more people will be thrown into the now expanded standard deduction, and as a result, won’t be able to itemize deductions.  But for those who are inclined to make charitable contributions, sound planning may permit you to make a large donation in a single year (and get a full deduction), then distribute the money over subsequent years to your favorite charity. 

Capital Gains vs. Retirement Distributions.  Tax rates on capital gains and dividends did not change under the new law.  But with lower rates on ordinary income, the relative advantage of taking capital gains and dividend income is less.  If we think that the new lower rates will expire in 2025 as written into the law, it might make sense to rethink distribution strategies which favor capital gains and dividends.  Our financial planning software can help us consider the impact of various distribution strategies. 

Roth vs. Traditional IRA Savings.  Almost seems to be a no-brainer now.  Tax rates will almost certainly be higher in the future than they are today.  That certainly makes Roths seem like a smarter investment than traditional IRA / 401k accounts. 

Passive Income Opportunities.  Under the new tax law, independent contractors and small business owners stand to reap significant tax benefits.  So, for those of you who have the option of working as a contractor vs. employee – think independence!  (of course, health insurance premiums have skyrocketed, and might eat up all your tax savings so nothing is simple!) 

This is a great time to update your financial plan and to see how the new tax law may impact your household.  Give us a call or send us an email to schedule an update today!