New tax law raising questions someone needs to answer – Carosa
Change often creates momentary chaos, and within that chaos hides opportunity for the taking, but only if you’re sharp-eyed and quick.
When it passed, everyone was ecstatic as they saw their take-home pay immediately shoot up. But now… now is more than a year later. And all those refund “bonuses” people had become so accustomed to? Well, you can’t get a refund back for something that was never taken away from you in the first place.
If you don’t know what this means, you may be missing the biggest opportunity in years (see “Has New Tax Law Twisted Business Owners Best Interests When It Comes to Retirement Savings Plans?” FiduciaryNews.com, February 26, 2019).
Face it. People are confused. Things have changed. If you look at the math, it’s pretty evident they’ve changed in a good way. But people don’t look at the math. They look at their feelings.
That could be a bad thing. Especially for them. For when you pay too much attention to your feelings and not enough attention to the math, that’s when someone who is quite adept at math will take advantage. You want to know the worst of it? Those “feelings” folks are likely too absorbed in finding their inner Alan Alda to even know they’ve been hoodwinked.
Like I said. That’s a bad thing.
And it’s a very frustrating thing for a fiduciary to have to witness. It’s like that stupid Prime Directive on Star Trek. Captain Kirk et al must have been very frustrated knowing Star Fleet demanded the not interfere and let nature take its course, even if that meant another civilization was about to go the way of the dodo.
Fortunately, for the most part, people aren’t dodo birds. They know enough to ask for help when they get confused. Astute professionals know to keep their eyes and ears open for the slightest sign of confusion. When the market is confused, there’s opportunity to add value, to help guide and direct and provide the kind of service all those marketing text books tell you to provide.
First, let’s review the basic “good news” from the fallout of the Tax Cuts and Jobs Act. Because of the dramatic increase in the standard deduction, you don’t need all those usual receipts you’d have to keep to show your accountant when tax time reared its ugly head.
You’d think this “easier” tax form might threaten the livelihood of those accountants. Not the case. It turns out the new tax law has created a certain amount of chaos that’ll continue to juice those accountants.
That’s where the really good news resides. And not just for accountants, but for other financial service providers, too.
Here’s where the changes impact retirement savers (and, especially, business owners):
Because the tax rates are so much lower (and the standard deduction is so much higher), there now becomes a serious question as to whether the primary assumption associated with tax-deferred retirement saving remains true.
Namely, in the past it had been assumed that one’s effective tax rate during retirement will be smaller than one’s effective tax rate while working. This made deferring taxes a good strategy.
But what if that assumption is wrong? What if some future administration and Congress decides taxes need to be raised? If you feel this scenario is more likely, then it’s better to contribute to an after-tax retirement savings vehicle (i.e., a Roth).
Indeed, this has been what younger workers have been doing for some time now. It’s likely this trend will only accelerate.
Then the question becomes: What is the best retirement savings vehicle given the specific make-up of the business (i.e., number of employees, employee demographics, overall profitability)? These are very different questions than the more familiar questions dealing with 401(k) plan design.
These questions, being terra incognito for most plan sponsors, require the presence of an expert professional.
Who do you think that might be?
READ MORE:
Get them addicted to saving — Carosa