The largest tax reform that we’ve seen in decades has recently been passed by Congress. While many are focused on what that means to their weekly paychecks, it’s important to consider how this should influence your retirement savings strategy.
While personal taxes are historically low, this may not last. In fact, it is likely they will be much higher down the road when you take withdrawals from your IRA or 401(k).
Because personal tax rates have decreased under the new tax laws, the amount of tax that you save from making a pre-tax investment has just gone down. This means the incentive to stash money in an IRA or 401(k) is much less valuable to you.
As always with a Roth account, you are saving after-tax dollars so you do not get a tax benefit in the year of investment, BUT you never owe any tax on that investment ever again. It grows and grows tax-free while it remains in the Roth and then you are exempt from all taxes when you take it out, regardless of tax rates at the time.
So what should your retirement savings strategy be now that tax reform has been enacted? Put only as much money into a 401(k) as is needed to get the full company match. After that, put as much money as possible in a Roth IRA or Roth 401(k).
If you are not eligible for a Roth IRA or do not have access to a Roth 410(k), save as much money as possible in a standard taxable non-retirement account.
I urge you to take advantage of this special time in history. By paying a small of amount of tax now, you gain the great privilege of not owing any tax on your Roth investments down the road. When you begin taking money out of your savings accounts during retirement and avoid the large ordinary income tax bill on withdrawals, you will be glad that you acted on this opportunity. Please call me if you would like to discuss this advantageous strategy.