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Exploit Expert Retirement Saving Opportunities Under TCJA

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Exploit Expert Retirement Saving Opportunities Under TCJA

One of the biggest landmines in the tax planning landscape is withdrawing from retirement accounts early and ending up taking a huge one-time tax hit.  The combination of a 10% early withdrawal penalty and the “income” tax on the money withdrawn is a brutal double-whammy!  Why would anyone do this?  Well, life happens.  Medical problems, divorce, business failures, etc.  Sometimes you need the money.  So, how do you do smart retirement planning in 2018 to minimize your current taxes while still planning smartly for your retirement?

With the new 20% pass-thru business deduction which caps out at $207,500 for single filers and $415,000 for joint filers, it has never been more important to keep an eye on your taxable income.

What is the difference between a traditional IRA and a Roth IRA?  Basically, a traditional IRA is a “pre-tax” contribution and a Roth IRA is an “after-tax” contribution.  Contributing to a traditional IRA reduces your taxable income – so it frequently makes sense to make a contribution up to the $5,500 limit if reducing taxable income yields a benefit. 

So why is a Roth IRA such an attractive approach right now?  Well, if you are thinking your income is going up and you are heading into your prime earning years or experiencing a bit of good fortune, contributing pre-tax money that you haven’t been taxed on yet may be very expensive when you get to your retirement years.  Thus, it may be a very good idea to take advantage of a new planning option under the TC&JA.

What’s new under the TC&JA?  There is an ability to do a conversion from a traditional to a Roth IRA and pay tax on the converted balance amount at the new lower 2018 tax rate, while eliminating the possibility of having to pay taxes on that amount in the future at your presumptively higher tax rate.

One smart way to keep taxable income low is through “above-the-line” deductions, like contributions to retirement plans, which reduce your taxable income, allowing you to continue to qualify for the QBI pass-thru business deduction we talked about in Volume #3 of this Newsletter.

  • Max out your traditional IRA with a $5,500 contribution;
  • Set up a 401(K) or SEP IRA and contribute up to $55,000 per year;
  • Set up a Cash Balance Pension Plan which raises the contribution limits closer to $150,000; and
  • Check your eligibility to make a yearly contribution to a Roth IRA.

We will be providing additional retirement and tax planning advice in future volumes.

Category: Tax

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