The Tax Reform has been etched in stone and the dust has, for the most part, settled. I wanted to describe to readers that there are still advantages to tax-advantaged accounts in 2018, even if we are at slightly lower rates, with a few other minor things to think about. Therefore, this article will go into detail on the pre-tax 401(k), Traditional IRA and the Health Savings Account, in relation to Tax Reform and how it can still open up more cash to invest. I will have a few tidbits at the end to think about, as well.
Tax Advantaged Account & Impact from tax reform
1.) Pre-Tax 401(k): Let’s start off with the largest area that can serve you on a pre-tax basis. We will begin with the 22% tax bracket, as my previous kicking Uncle Sam’s ass articles had the 25% bracket as an example (22% is now the equivalent bracket). Congratulations! The government has INCREASED what you can contribute by $500, or $18,500 in 2018. This represents a 2.77% increase to what you can contribute pre-tax. I am still planning on maxing out this bad boy. Why? Well, in 2017, the $18,000 pre-tax at 25% federal rate was a savings of $4,500. This year, $18,500 at a 22% federal tax bracket equates to $4,070 in savings. Therefore, the increase in 401(k) contributions slightly offsets the 3% decline in federal rates. However, still does not equate the tax savings one experienced in 2017. This obviously is not addressing any state tax savings, which still stands.
2.) Health Savings Account (HSA): My favorite of them all! Self-Only HSAs stand at $3,450, up from $3,400 last year (Family is $6,900). Similarly, last year’s $3,400 at a 25% federal tax rate would have saved you $850 in federal tax and this year, the $3,450 can net you $759 in federal tax savings. A drop, yes, but similar to above – slightly is offset by the increase in what you can contribute. Cumulative with #2 above, we are at a $4,829 federal tax savings; not including the FICA and state tax savings one receives from the HSA.
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