March 27 brings us the Motley Fool Answers podcast's monthly mailbag show, which Alison Southwick and Robert Brokamp dedicate to providing their best advice and insights in response to listener questions.
Our podcasting duet learned something last month: Having Ross Anderson, certified financial planner from Motley Fool Wealth Management -- a sister company of The Motley Fool -- along for the ride makes it so much easier.
In this segment, they consider how the GOP's tax overhaul changes the equation on retirement investing. Tax-advantaged accounts come in two varieties: Those that reduce your taxable income in the year you make deposits to them (like 401(k)s and Roth IRAs) and those that let you withdraw money tax-free in retirement (like traditional IRAs). But if you have money to save, odds are that Congress just cut your top marginal tax rate by a nice figure in December, which makes a break today worth less than it was.
A full transcript follows the video.
This video was recorded on March 27, 2018.
Alison Southwick: The first question comes from John. With the new tax laws depressing rates for now, do you think it is time to reconsider putting more savings into Roths, HSAs [I hate saying Roth-s].
Robert Brokamp: Roth-ths...
Southwick: That's a tough one. Savings into Roths, HSAs, and regular brokerage accounts instead of traditional tax-deferred accounts?
Brokamp: Well, John, you bring up a good point. Thanks to the Tax Cuts and Jobs Act, income tax rates have dropped from levels that were already historically low, depending on your tax bracket, to rates that we just haven't seen in a long time. So, yes, I think it makes total sense to look at situations, now, where you are giving up a tax break today, like the Roth, in order to have a tax break in the future. I definitely think it's worth considering the Roth, these days, more than you may have in previous years, because the tax deduction you're giving up just isn't worth as much as it used to be.
As for HSAs [otherwise known as health savings accounts], I'm not sure the new change does much for them. When you put the money in an HSA, you get the deduction and withdrawals are tax-free is you use it for qualified medical expenses. If you don't use the money and you let it grow throughout the years, at age 65 you can take it out penalty-free, but you still have to pay taxes on it, so it's sort of like a traditional tax-deferred account. I think HSAs are great. I just don't think the new tax law does anything for them in terms of making them more attractive or less attractive.
I still think it makes sense to contribute to traditional tax-deferred accounts if you're in a higher tax bracket today, and especially if you expect to be in a lower tax bracket in the future. But the trick there is to really make it worthwhile, you've got to invest the tax savings. By contributing to, say, your traditional 401(k), you're saving $3,000 on your tax bill, you should be investing that and saving it for your future. If you're just going to spend that money, you probably should just go with the Roth.
As for contributing to a regular brokerage account instead of a retirement account, I think the most compelling reason you would do that is if you think you might need the money before you're age 59 1/2.
Ross Anderson: The only thing I would add to that is to look at what you have in terms of deductions. If you are in a high-tax state like California or New York, where you're paying a lot of state income taxes, you're losing that deduction for the most part; and so, even though the rate that you're paying on your taxes is coming down, the amount that you have to pay in taxes may not be. So, before you shift everything from pre-tax to Roth, I would at least look at how the loss of deductions is going to impact you, as well.