The Tax Cuts and Jobs Act made sweeping changes to the tax laws. Brackets have been changed, deductions have been eliminated, and retirement plans have been affected. You may be wondering what the new law means for your IRA. Here are 5 things you need to know:
1. Recharacterization of Roth IRA conversions is gone. Starting for 2018 conversions, tax reform does away with your ability to recharacterize. Does this mean that you should not convert to Roth IRA? No. In fact, tax reform’s new lower rates may make now a better time than ever for some taxpayers to convert. You will just need to be sure that conversion is the right move for you because there is no way to undo the transaction. Your conversion will be irrevocable. Good professional tax and financial advice will be more important than ever when making the decision to convert.
2. Rothification is not ready for prime time….yet. In the debate leading up to tax reform’s passage, there was much discussion about “Rothification” — ending tax-deferred contributions that reduce income and requiring after-tax contributions that promise tax-free earnings down the road. These proposals were met with much criticism and did not make it into the final law, but expect to see them again. Congress is always interested in ways to increase current tax revenue.
3. Qualified Charitable Distributions (QCDs) are more valuable than ever. With the doubling of the standard deduction and the suspension and limitation of many other deductions, far fewer taxpayers are likely to itemize. This means that far fewer will be able take advantage of the deduction for charitable giving. With a QCD, you can use the standard deduction and get a tax break for your charitable contributions. Is a QCD right for you? You must be age 70 ½ and the funds from your IRA must go directly to a qualified charity. You are also limited to $100,000 annually. A bonus benefit is that your QCD can satisfy your required minimum distribution.
4. Medical expense exception to the 10% penalty is expanded. Do you have high medical expenses? Tax reform may offer some relief by lowering the threshold to qualified for penalty-free IRA distributions. For 2017 and 2018, if your medical expenses exceed 7.5% of your adjusted gross income (AGI) you may be eligible to take a penalty-free distribution from your IRA. The penalty-free distribution is limited to the amount by which your medical expenses exceed 7.5% of AGI.
5. Long live the stretch IRA. The stretch IRA is one of the biggest benefits of the tax code, allowing you to pass your IRA to children and even grandchildren. Your beneficiaries can stretch RMDs from their inherited IRAs for years and enjoy decades of tax-deferred growth. If it is a Roth IRA, it’s even better. The growth is tax-free. There were proposals in Congress to do away with this tax break and require non-spouse beneficiaries to use a five-year rule. Good news! Despite rumors to the contrary, these proposals were not made part of the final law. The stretch IRA has survived and is still with us.