Marcia Wagner arrived bleary-eyed but ready to go at The 2017 New England Wealth & Retirement Conference in Foxborough, Massachusetts on Friday morning after a late night spent scrutinizing provisions of the administration’s tax reform proposal and Trump tax cuts.
“There are no adjustments to 401k plans,” Wagner, principal of The Wagner Law Group, told advisors in the audience in a rapid-fire recap at the start of a regulatory-focused session. “We have somehow avoided Rothification,” although she noted it doesn’t mean that the final version of the bill will not include some form of Rothification.
The act also liberalizes certain rules regarding hardship distributions, with Wagner explaining the required six-month moratorium on tax-deferred contributions once a loan is initiated will no longer exist.
Shockingly, the proposal would eliminate many standard forms of deferred compensation, such as 401k mirror plans, and as of December 31, 2017, Sections 409A, 457(b) (for tax-exempt employers), 457(f), and 457A of the tax code would no longer exist, something she called “massive.”
Other non-retirement related provisions involve the long-watched and longer-debated estate tax.
“Under the Act, the federal estate tax exemption would double the basic exclusion amount (currently $5 million) to $10 million, which is indexed for inflation from 2011,” Wagner said. “The estate tax and generation-skipping taxes would be repealed in six years, in 2024, but the step-up in basis to beneficiaries would be retained.”
It means the value of the property “in the beneficiary’s hands is its fair market value, and its sale at such valuation will not generate any capital gains.”
In the Trump tax cuts, the corporate tax rates would be lowered to a flat 20 percent rate beginning in 2018, she added, and that one consequence is that an expenditure would be “more valuable under the current code than under the modified code.”
The short-term effect would be greater on defined benefit plans than defined contribution plans, such as 401ks.
The act also creates a new 25 percent maximum tax rate on pass-through business income.
“This new rate, however, is subject to an anti-abuse rule that provides that 70 percent of income derived from an active business is subject to ordinary rates and 30 percent is business income subject to the maximum 25 percent rate for active owners, with the possibility of increasing the 30 percent rate to a higher rate,” she concluded.
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
