With all the confusion surrounding the recent tax overhaul, you might be wondering if any of the changes will impact how you save for retirement.
Rumors flew about the possibility of the tax code overhaul limiting tax-sheltered retirement saving when the legislation was working its way through Congress. But the final bill, signed into law last month, bears little if any bad news for savers.
The overhaul left the rules governing retirement accounts largely untouched, experts say. There are just a few minor changes you should understand.
What remains the same
The contribution limits and catch-up contribution limits for 401(k) and individual retirement account (IRA) plans were not altered by the overhaul, the Vanguard Group reports.
For example, for the 2018 tax year, the federal government will allow you to save as much money in such accounts as we reported prior to the overhaul’s passage in “Government Says You Can Stash Away More for Retirement in 2018.”
Federal income tax deductions for contributing to retirement accounts also remain in place, according to Vanguard and the H&R Block Tax Institute. These include deductions for money saved in:
- Traditional 401(k) accounts
- Traditional IRAs
- Health savings accounts (HSAs)
- Self-employed retirement accounts
What has changed
Most folks are unlikely to be affected by two retirement account changes in the overhaul. Still, it’s good to be aware of them.
Perhaps the biggest tweak is the repeal of Roth IRA recharacterizations.
Owners of traditional IRAs have the option to convert their accounts to Roth IRAs. In the past, they could also reverse that conversion, known as “recharacterizing.” But the tax code overhaul repealed the ability to recharacterize a Roth conversion.
So, starting with tax year 2018, if you convert a traditional IRA to a Roth IRA, you can no longer undo that change. In other words, you’re stuck with the Roth.
The nonprofit Tax Foundation reports this change is estimated to increase the federal government’s revenue by $500 million over a decade.
Another tweak applies only to folks living in 2016 presidentially declared disaster areas. A new special rule allows them to take up to $100,000 from retirement plans and IRAs and be exempt from the 10 percent early withdrawal tax, according to the Tax Foundation.
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