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5 ways the tax bill will affect your retirement

Re-posted from

The $1.2 trillion tax overhaul that was signed into law by President Trump on Friday will affect your retirement in a number of ways.

The tax plan no longer includes lowering contribution limits on retirement accounts or nixing traditional individual retirement accounts in lieu of Roth individual retirement accounts (which would have shifted when retirement savers pay taxes on their savings), but it does address individual retirement accounts and increases the standard deduction (by almost double), which could affect the way people itemize their charitable donations. These changes would be for next year’s taxes, to be filed in 2019 — 2017 tax returns are due on April 17.

 When it comes to retirement, 60s are the new 50s

Here are five ways retirees will be affected:

Retirees will have to be more strategic about their IRA conversions

The new tax bill would stop what’s called “recharacterizations” of IRAs. Recharacterizations allow a person to undo their decision to rollover or convert accounts to Roth IRAs. Therefore, retirement savers who have already made these conversions this year should consider before the new year if they want to reverse them.

And contribute to charity twice every two years

Retirees likely won’t be itemizing since they don’t have many deductions, except for charitable contributions, property taxes and perhaps state income taxes, said Andrew Houte, director of retirement planning at Next Level Planning and Wealth Management in Brookfield, Wis. Some retirees may want to take advantage of Qualified Charitable Distributions, which allow them to donate directly to charity from their individual retirement accounts without having to itemize those donations (after 70 ½ years old). Because of the increase in the standard deduction, retirees may benefit from making more charitable donations, but less frequently — for example, donate twice as much, but every other year — which would help taxpayers by having more to write off than the standard deduction limit, said Scott Bishop, executive vice president of financial planning at advisory firm STA Wealth in Houston, Texas. More people may also invest in donor-advised funds instead of donating cash, he said.

Personal income tax rates are changing, but still important

Personal income taxes would be lowered for most households — to 10%, 12%, 22%, 24%, 32%, 35% and 37%. Retirees will have to watch their income to avoid ending up in a higher tax bracket, Bishop said. Income includes withdrawals from retirement accounts, required minimum distributions and ordinary income. For example, people with large balances might want to begin distributions before turning 70 ½ years old, when they’ll be required to take distributions in some accounts — that way, when they get there, they won’t be forced into a higher tax bracket. It takes a little calculating, and predicting what income will look like in the future versus now, but it could save retirees money down the road.

Also see: The four worst things about the tax bill

Small businesses may not offer retirement accounts

Most 401(k) plans and similar defined contribution benefits are offered by large employers because they’re too expensive for small businesses to administer. Under tax reform, it may become even less advantageous for small businesses to host these accounts, said Trevor Gerszt, chief executive officer of CoinIRA, a company that allows savers to convert assets into digital currency, such as bitcoin. The bill reduces the income tax rate for small businesses but does not address offering or contributing to retirement plans, which are incentives to establish these accounts, according to the American Retirement Association.

Some retirees may want to move

Deductions for mortgage interest rates were left untouched, and $10,000 in local property taxes will be deductible on a federal level. That means income tax-free states will be best for retirees, according to Brett Anderson, a financial adviser and president of St. Croix Advisors in Hudson, Wis. Retirees are more easily able to move from state to state because they have no job tying them down, he said, which also means they can be more sensitive to the various income tax rates in various states. There are a few states that soar above the rest for tax-friendly states best for retirees, such as Nevada, New Mexico and Wyoming.

The new bill also reduces the maximum amount of mortgage debt a person can acquire for their first or second residence, to $750,000 for married couples filing joint tax returns (or $375,000) for those married filing separately, down from $1 million. This won’t affect home purchases before Dec. 16, 2017 so long as the home closed before April 1, 2018.

Larry Swedro at Computer Monitors

Swedroe: Checking In With The ‘Gurudex’

Larry Swedroe

One of my favorite sayings about the market forecasts of so-called experts is from Jason Zweig, financial columnist for The Wall Street Journal: “Whenever some analyst seems to know what he’s talking about, remember that pigs will fly before he’ll ever release a full list of his past forecasts, including the bloopers.”

You will almost never read or hear a review of how the latest forecast from some market “guru” actually worked out. The reason is that accountability would ruin the game—you would cease to “tune in.” But I believe forecasters should be held accountable. Thus, a favorite pastime of mine is keeping a collection of economic and market forecasts made by media-anointed gurus and then checking back periodically to see if they came to pass. This practice has taught me that there are no expert economic and market forecasters.

Thanks to research compiled by the team at InterTrader, we can examine the 2015 stock market recommendations from 16 leading investment banking firms. They produced what they called the Gurudex.

How The Gurudex Works
InterTrader’s prediction data was sourced from The Motley Fool website for the period from Jan. 1, 2015 through Dec. 31, 2015. They collected the date of the prediction, the starting and ending prices, and the prediction itself (buy or sell). Because almost all the predictions did not specify a “time frame” for the investment, they provided results for 30-, 90- and 180-day investment periods, though all positions were closed out at the end of the year.

A guru’s prediction was deemed accurate if the sell price was higher than the buy price for the selected investment period—a very low bar. When reviewing the results, keep in mind that they do not account for transaction costs. The following is a summary of their findings:

  • For the 30-day investment period, 55 percent of the recommendations produced a gain. The total return of all the forecasts was just 0.8 percent, less even than the return one could have earned using an FDIC-insured deposit account from an online bank. It’s also less than the 1.3 percent return of Vanguard’s 500 Index Fund (VFINX), which does include all costs. Nine of the 16 investment banking firms posted accuracy percentages above the 50 percent mark, and six came in below. The highest accuracy rate was 74 percent for Barclays. However, the total gain of the firm’s predictions, before trading costs, was just 2.5 percent. The lowest accuracy rate was 33 percent for Mizuho. And that firm’s total return was an ugly -11.2 percent.
  • For the 90-day investment period, 49 percent of the recommendations produced a gain, with the aggregate average loss being 1.5 percent. Now, just seven of the 16 firms had an accuracy rate above 50 percent, and seven had an accuracy rate below 50 percent. Nomura posted the highest accuracy rate with 70 percent. However, the total return of the firm’s predictions, even before expenses, was -2.3 percent. Citicorp now had the worst accuracy rate at 14 percent. Its total return was -14.1 percent.
  • For the 180-day investment period, just 42 percent of the recommendations produced a gain, with the aggregate average loss being 3.7 percent. Only three of the 16 firms had an accuracy rate greater than 50 percent, while 10 of them had an accuracy rate below 50 percent. BMO Capital Markets had the highest accuracy rate at 58 percent, but its predictions produced a total gain, before expenses, of just 0.8 percent. Amazingly, Canaccord Genuity put up a 0 percent accuracy rate. I don’t think you could get a score of zero if you actually tried to do that. Its predictions produced a total return of -12.9 percent.
  • Using the end of the year, 43 percent of the recommendations produced a gain, with the aggregate average loss being 4.8 percent, pre expenses. Just four firms had accuracy rates above 50 percent, while 10 had rates below that figure. Nomura’s 60 percent accuracy rate was the highest, although its total gain, before expenses, was just 2.8 percent. Citicorp’s 14 percent accuracy rate was the lowest, and its recommendations earned a total return of -3.1 percent.


The preceding data serves as a reminder of the wisdom in Warren Buffett’s words of advice on the subject of the value of stock market forecasters: “We have long felt that the only value of stock forecasters is to make fortune-tellers look good. Even now, Charlie (Munger) and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children.”

Larry Swedroe is the director of research for The BAM Alliance, a community of more than 140 independent registered investment advisors throughout the country.