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The Overview

The U.S. Senate recently passed a new tax bill titled, “Tax Cuts and Job Act”. President Donald Trump signed this bill, stating that it will be beneficial both to individuals and corporations.  The bill will go into effect for 2018 taxes, bypassing 2017 taxes.

The Breakdown

The bill has a wide range effect, impacting all taxpayers to a varying degree. As always, your income will significantly impact your taxes – those in higher tax brackets will feel a bigger impact. However, there are many tax brackets that are lowering.

Analysts have noted that the standard deduction will nearly double for many households, which means many will opt to take that rather than itemize their taxes in the coming years.  In addition, the child tax credit for each child under the age of 17 has significantly increased from $1,000 to $1,600 per child.  It’s also important to note that the personal tax exemption has been eliminated under this new tax bill, which could be a setback for some households.

The Implications

If you’re anything like me, hearing the news of a new Senate Tax Bill brought one question to mind, “What does this mean for me, specifically?”

The Balance explains the bill well,

“The Act keeps the seven income tax brackets but lowers tax rates. Employees will see changes reflected in their withholding in their February 2018 paychecks. These rates revert to the 2017 rates in 2026.

The Act creates the following chart. The income levels will rise each year with inflation. But they will rise more slowly than in the past because the Act uses the chained consumer pride index. Over time, that will move more people into higher tax brackets.”

The article goes on to explain,

“The Act lowers the maximum corporate tax rate from 35 percent to 21 percent, the lowest since 1939. The United States has one of the highest rates in the world. But most corporations don’t pay the top rate. On average, the effective rate is 18 percent.”

Hopefully this helps you get a sense of how you’ll directly be affected. Please feel free to contact us if you’d like to further discuss the bill and how it specifically affects you.

Save Now, Then Save Some More!

We all know that saving for retirement is important, and it’s never too early to start.  However, it never feels as simple as putting money aside – there’s always something that gets in the way.  Whether it’s loans or debt that’s holding you back, is it better to pay off what you owe first or prioritize saving for your retirement account?

The Million Dollar Question

Building your retirement savings account is critical, but at what cost?  Most of us enter the working world with some level of student loan, not to mention the possibility of developing more down the road – car loans, credit card debt, etc. – yet we’re being told to start saving for our retirement as soon as possible.

So how do you balance paying off owed money and simultaneously save for the future?

The Balance

As a financial advisor, I’m a strong advocate for saving for retirement as much as you can as fast as you can.  That being said, I firmly believe the priority is to pay off your debt first, particularly the ones with high interest rate.

If you have high interest debt, then the amount you’re losing in interest each month may be more than what you could be earning in compound interest in savings.

I often tell my clients that once they’ve paid off high interest rate debt, then they can start contributing to their retirement savings account.  This, of course, will look different case by case, but never rule out saving for retirement just because you owe money!  Prioritize paying off your debt now as a way of being proactive about your future.  The better you plan, the better you retire – and therein lies the balance.

Don’t Take My Word for It

Forbes weighed in on this topic as well,

“While this question is best put to a financial planner who can look at your entire financial picture, one way to think of it is that, if your student loan interest rate is 6.8%, the payments you make toward those loans give you a guaranteed 6.8% return on your money. Your retirement investments, especially after accounting for inflation, may not do as well. On the other hand, if you’re 50 and are behind on saving for retirement, you’ll still want to get the ball rolling since time is the biggest factor in how much your investments can grow. Bera says that for any debts with interest rates above 6%, she favors paying down debt over saving for retirement, but once you eliminate all those and are left with debts with lower interest rates, the emphasis would swing back to retirement.”

Low interest debt that’s tax deductible, like a mortgage, doesn’t need to be paid off before saving for retirement. However; I recommend you pay off all other high interest debt first, and then you can begin contributing the maximum to your retirement savings account.

If you’d like personalized advice on how much you should be paying/saving, one of our advisors will be happy to sit down with you and strategize how to get you on track for your best retirement.

Please schedule a call with us here if you would like to discuss your options.

Big News from the IRS

After two years without any changes, the IRS announced they will be increasing the 401(k) contribution limits for 2018. This is exciting news!

The increase in cost of living will allow individuals to contribute up to $18,500 ($500 increase) per year to their 401(k) retirement plan.  Additionally, this increase will apply to other retirement accounts including 403(b) plans, most 457 plans, and Thrift Savings Plans (TSPs), however; the IRA and Roth IRA account contribution limits will not change.  All employees should expect to see notifications from their employers about this increase.

Will This Really Make a Difference in the Long Run?

I always tell my clients that in order to grow their retirement savings significantly, they need to contribute as much as possible as young as possible.  While an additional $500 per year may not sound like a major increase, ultimately these contributions will add up to a lot come retirement.

CNBC notes the significant difference of increasing your contribution to $500 each year, rather than simply putting an additional $500 in your savings account,

“As personal finance site NerdWallet points out, it could mean up to $70,000 more in your retirement account. The site calculated how much bigger your retirement fund would get if you started investing an additional $500 a year. It assumed a retirement age of 67 and a 6 percent annual rate of return. To give you an idea of just how powerful compound interest is, NerdWallet also highlighted how much money you’d have if you didn’t invest the $500 a year and simply kept it as cash:

  • If a 30-year-old starts investing an extra $500 a year, it could mean an extra $70,212 in retirement, versus $18,500 saved in cash.
  • If a 40-year-old starts investing an extra $500 a year, it could mean an extra $34,712 in retirement, versus $13,500 in cash.
  • If a 50-year-old starts investing an extra $500 a year, it could mean an extra $15,202 in retirement, versus $8,500 in cash.”
How the Increase Positively Impacts Your Taxes

In addition to increasing your retirement savings, your taxable income will also be reduced when you contribute the additional $500.

If you have an employee contribution matching plan, a good rule of thumb is to contribute the maximum matching amount so you take full advantage and not leave any money on the table.  However, if you can contribute more and maximize your 401(k) contributions each year (coupled with compounding interest), you’ll have a much larger retirement savings account.

Schedule a free call with us today if you have any questions regarding the increase in 401(k) contribution limits for 2018.