After circling and re-circling the healthcare wagon, President Trump’s administration now shifts its attention to tax reform. A level of skepticism seems to shroud every major piece of legislation that “Number 45” has put forward so far, but there seems to be some optimism around his plan for tax reform. Many news outlets have accused Trump’s new tax plan as a big tax cut for the wealthiest people in the country, but there are some implications that this new tax code will be good for those who are saving up for life after work.
One of the big knocks on the president’s new tax plan is the big tax break that corporations will receive. The corporate tax rate is currently at 35%, but it would drop to only 20% under the new tax code. This means big savings for big business. So, how does it look for the middle class and their retirement savings?
Most people who are planning and saving for the day that they no longer have to work for a living put their money into a 401(k) account that is offered by their employer. One of the great benefits of a traditional 401(k) account is that the funds that you designate for the account are deposited pre-taxation. These funds are only taxed once they are withdrawn.
There is also the Roth 401(k). With this particular way of investing in retirement, taxes have already been withdrawn before the money is put into the Roth 401(k), but there is no tax upon withdrawal of funds.
The proposed tax reforms make greatly simplify the tax code in relation to what it is now. Currently, there are seven tax brackets for individuals, ranging from 10% to just 39.6%. The reforms proposed would decrease the current code from seven brackets to only three of them, 12%, 25%, and 35%.
Lower taxes on the middle class could change the way people invest in their future for the betterment of individuals and the country as well. Lower tax rates could embolden the middle class to try a Roth 401(k) plan because even though the taxes will be taken out immediately, it will be a reduced amount of taxes that they will have to pay in the first place.
Majority of people who are actively planning for post-career life go with pre-tax IRA and 401(k) options, and they could be the biggest winners of all. Many people choose to invest their 401(k) accounts to promote long-term growth of their account. With corporate taxes potentially dropping by 15%, that means more money in the pockets of the people who own those corporations. If you invest your 401(k) into a mutual fund with a portfolio of established profitable stocks, then you will see those corporate savings working for you as well.
As of June 30, 2017, of the nations $26 trillion in retirement assets, 19% was in 401(k) plans, that’s just north of $5 trillion. Of the $5 trillion plus in 401(k) plans, 65% was in mutual funds. That means that 65% of people with a 401(k) account stand to win big if the corporate tax break stays in tact through the various stages of negotiation that the new tax plan is sure to undergo.
Time will tell if the plan will come to fruition for the new Administration. Until then, having a strategic retirement plan that best fits your goals is important. We are here to help you as you approach retirement or navigate through retirement.