Finance - HL 285 (2)

Helpful miscellaneous articles regarding our retirement plan and planning.  Like you, I review my retirement nestegg and plan from time to time.  Recently, I went though some continued education for some credentials I maintain and it occurred to me that we all could use a review about these issues.  So with your help, we will share and post articles and info that may be helpful and of interest to many of you in this section.

5 ways the tax bill will affect your retirement

By Alessandra Malito

Published: Dec 22, 2017 11:16 a.m. ET

From IRA conversions to charitable deductions, here’s what you need to know

Getty Images

Mitch McConnell speaks after the senate voted on the tax reform bill on Dec. 20, 2017.

The $1.2 trillion tax overhaul that was signed into law by President Trump on Friday will affect your retirement in a number of ways.

The tax plan no longer includes lowering contribution limits on retirement accounts or nixing traditional individual retirement accounts in lieu of Roth individual retirement accounts (which would have shifted when retirement savers pay taxes on their savings), but it does address individual retirement accounts and increases the standard deduction (by almost double), which could affect the way people itemize their charitable donations. These changes would be for next year’s taxes, to be filed in 2019 — 2017 tax returns are due on April 17.

See: Here are the winners and losers of the final version of the Republican tax bill

Here are five ways retirees will be affected:

Retirees will have to be more strategic about their IRA conversions

The new tax bill would stop what’s called “recharacterizations” of IRAs. Recharacterizations allow a person to undo their decision to rollover or convert accounts to Roth IRAs. Therefore, retirement savers who have already made these conversions this year should consider before the new year if they want to reverse them.

Don’t miss: The Trump calculator — will you pay more or less?

And contribute to charity twice every two years

Retirees likely won’t be itemizing since they don’t have many deductions, except for charitable contributions, property taxes and perhaps state income taxes, said Andrew Houte, director of retirement planning at Next Level Planning and Wealth Management in Brookfield, Wis. Some retirees may want to take advantage of Qualified Charitable Distributions, which allow them to donate directly to charity from their individual retirement accounts without having to itemize those donations (after 70 ½ years old). Because of the increase in the standard deduction, retirees may benefit from making more charitable donations, but less frequently — for example, donate twice as much, but every other year — which would help taxpayers by having more to write off than the standard deduction limit, said Scott Bishop, executive vice president of financial planning at advisory firm STA Wealth in Houston, Texas. More people may also invest in donor-advised funds instead of donating cash, he said.

Personal income tax rates are changing, but still important

Personal income taxes would be lowered for most households — to 10%, 12%, 22%, 24%, 32%, 35% and 37%. Retirees will have to watch their income to avoid ending up in a higher tax bracket, Bishop said. Income includes withdrawals from retirement accounts, required minimum distributions and ordinary income. For example, people with large balances might want to begin distributions before turning 70 ½ years old, when they’ll be required to take distributions in some accounts — that way, when they get there, they won’t be forced into a higher tax bracket. It takes a little calculating, and predicting what income will look like in the future versus now, but it could save retirees money down the road.

Also see: The four worst things about the tax bill

Small businesses may not offer retirement accounts

Most 401(k) plans and similar defined contribution benefits are offered by large employers because they’re too expensive for small businesses to administer. Under tax reform, it may become even less advantageous for small businesses to host these accounts, said Trevor Gerszt, chief executive officer of CoinIRA, a company that allows savers to convert assets into digital currency, such as bitcoin. The bill reduces the income tax rate for small businesses but does not address offering or contributing to retirement plans, which are incentives to establish these accounts, according to the American Retirement Association.

Some retirees may want to move

Deductions for mortgage interest rates were left untouched, and $10,000 in local property taxes will be deductible on a federal level. That means income tax-free states will be best for retirees, according to Brett Anderson, a financial adviser and president of St. Croix Advisors in Hudson, Wis. Retirees are more easily able to move from state to state because they have no job tying them down, he said, which also means they can be more sensitive to the various income tax rates in various states. There are a few states that soar above the rest for tax-friendly states best for retirees, such as Nevada, New Mexico and Wyoming.

The new bill also reduces the maximum amount of mortgage debt a person can acquire for their first or second residence, to $750,000 for married couples filing joint tax returns (or $375,000) for those married filing separately, down from $1 million. This won’t affect home purchases before Dec. 16, 2017 so long as the home closed before April 1, 2018.

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From: k1fjm@aol.com

Date: 01/10/18 10:17:32

To: mark.pcndir@gmail.com

Subject: Fwd: Retirees, Shareholders Big Winners Of New U.S. Tax Laws                       

10jan18 (my 71st Birthday!!!)

Hello Mark:

FYI!!

bt
Pete Heins of "Thirty Done Dirty"
USCG-ret, EAL-Striker, ex-MDW, DAL-ret

From "Aviation Week" letter of 10jan18:

Retirees, Shareholders Big Winners Of New U.S. Tax Law

Michael Bruno

It may never be a better time to be a former aerospace and defense worker.

That simple truth is dawning now that the second-order ramifications of the new U.S. tax law are emerging. After achieving a long-sought policy victory, businesses look to make major cash infusions into their historically underfunded pension funds. The result will probably solicit cheers from pensioners, shareholders and corporate finance executives at legacy companies alike.

“We got tax reform, and now it’s likely we get some pension prefunding,” Morgan Stanley analysts say.

Lockheed Martin, the top Pentagon contractor by annual sales, foreshadowed the move late last year, and others such as Raytheon and Arconic may follow suit in big ways, several Wall Street analysts predict.

Source: Bloomberg

The rest of legacy industry manufacturers could do so as well, just to a lesser degree. “Other defense companies with defined benefit pension plans like Northrop Grumman, Boeing, L3 Technologies, General Dynamics and Harris Corp. have either addressed required contributions already, have other capital deployment priorities, or have fairly small required contributions,” say J.P. Morgan analysts. No matter who does what or to what extent, the bottom line is always the driving force. Here’s how it works. Under the new law passed by congressional Republicans and signed by President Donald Trump in late December, pension contributions through September 2018 can be used on a pretax basis to lower earnings under the old tax regime’s 35% statutory rate for 2017. For instance, the 35% tax shield saves Lockheed about $475 million versus making its 2019-20 contributions with a 21% rate, according to J.P. Morgan. Next, by expeditiously handling future obligations mandated by pension funding, so-called free cash flow generated by the companies going forward increases “substantially” and provides executives with more flexibility in how to use it—including for shareholder returns. That freer cash also will be taxed at or near the new lower 21% corporate tax rate, ostensibly. Other savings accrue, as well. “We see [accounting] expense falling, since the additional invested funds will generate a return for the pension in 2019-20,” J.P. Morgan says. There would be more immediate reimbursement from government customers on those pension payments, since such spending is an allowable cost under certain federal contracts. Similarly, companies should be able to pay less on variable Pension Benefit Guaranty Corp. insurance premiums, which are determined by the amount of current underfunding. All of this should underpin earnings per share (EPS), but there are other ways, too. For example, assuming companies such as Lockheed take out new debt at current low interest rates to fund the pension payments, they also could leverage a larger spread, or difference, between expected long-term rates of return on assets and current debt yields. This, in turn, provides more accretion on EPS in the near term. And stock volatility might be reduced because Wall Street views debt as a lower risk than pension underfunding. Pensioners who may also be current shareholders via 401(k), share matching or other retirement vehicles could be doubly pleased. Yet defense contractors and aerospace exporters also could reap knock-on dividends related to the cash infusions—namely, political. “In the event that defense companies accelerate pension funding, it may be well received from a political perspective, given the support it shows from a labor standpoint,” Morgan Stanley notes. The benefits of prefunding pensions could not have come at a more welcome time for industry. Lockheed took a “pension funding holiday” in 2015-17 as it strove to generate free cash and knew it faced “significantly” higher required pension contributions of $3.3 billion through 2019, Chief Financial Officer Bruce Tanner said last October. “So we would clearly want to accelerate some in that regard if, in fact, tax reform happens,” he told analysts at the time. As for workers today, the results may be mooted. Those who are eligible to receive pensions or are shareholders, or both, will benefit accordingly. But current and future workers might see conditions improve slightly. After the tax law was enacted, for instance, Boeing pledged $100 million for workforce development via training, education and other capabilities, as well as another $100 million toward “workplace of the future” facilities and infrastructure enhancements. However, workforce “streamlining” is expected to continue apace as companies invest in new technologies that bring automation or redundancy, and mergers and acquisitions may accelerate due to deeper corporate pockets. And these yet-to-be former workers will likely have little or no pensions or shares.

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(As with any of these informative articles, anyone who needs someone to talk to about

this very subject contact me and I can direct you to a knowledgeable advisor).

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