Intellectual Capital

Personal Finance

With Recent Tax Cuts, Investors May Need to Revisit Their Financial Planning

Executive Summary

In light of the recent 2018 tax cuts, taxpayers should review their financial plans. The following article provides discussion points for advisors to help clients reduce the impact of these tax changes by diversifying the tax treatment of their retirement accounts. Plus, with some investors expecting to pay less in taxes, advisors can help these clients explore ways to boost their retirement savings. 

Having just faced the April 17 tax filing deadline, U.S. taxpayers should be considering the wide-ranging impact of the tax law changes for 2018.

While the biggest change is a dramatic reduction in tax rates for corporations and closely held businesses, the tax overhaul also reduces marginal tax rates for individuals at most income levels.

At the same time, individual tax deductions will be changed. Among the changes: eliminating personal exemptions, increasing the standard deduction, and the reduction or elimination of certain itemized deductions (including a new $10,000 cap on deducting state and local taxes).

Two T. Rowe Price senior financial planners, Judy Ward, CFP®, and Stuart Ritter, CFP®, say that investors should approach their financial planning relative to the new tax laws using fundamental planning principles. They say:
 

  • An important lesson from the tax cuts is how these laws can change with the shifting political landscape. Many new provisions for individual taxes expire in 2025. Tax increases could follow.
Marginal Tax Rates for Single and Married Filers—2017 Versus 2018
Marginal Tax Rates for Single and Married Filers—2017 Versus 2018

Note: Red lines show the 2018 tax brackets. Bracket boundaries for single filers begin at $9,525, $38,700, $82,500, $157,500, $200,000, and $500,000. For married filing jointly: $19,050, $77,400, $165,000, $315,000, $400,000, and $600,000.
Source: U.S. Tax Cuts and Jobs Act of 2017.

  • One way to potentally reduce the impact of the tax changes is to diversify the tax treatment of retirement accounts, using taxable accounts, tax-deferred accounts, and potentially tax-free Roth accounts. With temporarily lower tax rates, Roth accounts may be more attractive.
  • Investors also should consider rebalancing their asset allocations to manage market risk.
  • If investors expect to pay less in taxes, they may be able to boost their retirement savings—aiming for 15% or more of their current salaries (including any employer contributions). Over the long term, less tax revenue could pressure funding for Social Security and Medicare benefits, so investors could end up relying more on their savings.
     
The recent tax changes are extremely complex, and the full effects are still not clear. Taxes are just one factor in financial decisions. Investors are strongly urged to consult their tax advisors.

This material has been prepared by T. Rowe Price for general and educational purposes only. It is not a fiduciary recommendation concerning investments or investment management. T. Rowe Price, its affiliates, and its associates do not provide legal or tax advice. Any tax-related discussion contained in this material, including any links, is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding any tax penalties or (ii) promoting, marketing, or recommending to any other party any transaction or matter addressed herein. Please consult your independent legal counsel and/or professional tax advisor regarding any legal or tax issues raised in this material. All charts and tables are shown for illustrative purposes only.

Important Information

This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.

The views contained herein are those of the authors as of May 2018 and are subject to change without notice; these views may differ from those of other T. Rowe Price associates.

This information is not intended to reflect a current or past recommendation, investment advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. The opinions and commentary provided do not take into account the investment objectives or financial situation of any particular investor or class of investor. Investors will need to consider their own circumstances before making an investment decision.

Information contained herein is based upon sources we consider to be reliable; we do not, however, guarantee its accuracy.

Past performance cannot guarantee future results. All investments are subject to market risk, including the possible loss of principal. All charts and tables are shown for illustrative purposes only.

T. Rowe Price Investment Services, Inc., Distributor.

T. ROWE PRICE, INVEST WITH CONFIDENCE, and the bighorn sheep design are, collectively and/or apart, trademarks of T. Rowe Price Group, Inc. © 2018 T. Rowe Price. All rights reserved.

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