Tax Day is fresh on our minds, so I thought it would be appropriate to discuss some implications of the new tax law on your investments. Many do not realize that the new tax rates that are effective this year will expire in 2026 which means that taxes on Traditional IRA distributions will revert to the previous higher tax rates.
As a recap, Traditional IRA contributions are made pre-tax and are fully taxable as income upon distribution. Conversely, Roth IRA contributions are made after-tax but the distributions are tax free. Now that most people have received a decrease in their income taxes, it is a prudent time to consider making Roth IRA contributions with the tax savings.
It is impossible to speculate on what will or will not happen with the tax legislation in eight years. If the rates do revert, now may be a good time to pay the taxes at the lower rate and contribute to a Roth IRA. If you are currently contributing to a 401k or similar plan through your employer, it may make sense to find out if they allow Roth contributions.
Keep in mind the IRA contribution limits: for 2018, your total contributions between traditional and Roth IRA’s can not exceed $5,500 ($6,500 if you are 50 or older). Also note that if you are married and file taxes jointly, your combined adjusted gross income must be under $189,000 to contribute fully to a Roth IRA and under $120,000 for single filers.
If you would like to discuss Roth contributions and what might make sense for you, please do not hesitate to give me or Karl Wagner a call. As always, we stand ready to guide you in securing your financial future and encourage you to reach out to us.
Source: Fidelity Investments
and Research Associate