Taking Advantage of the New Tax Law

From Andy Bayliss Posted in Alerts

 
ANDREW BAYLISS

Vice President | Retirement Services
Marsh & McLennan Agency LLC

Andrew.Bayliss@MarshMMA.com
Tel: 617 587-2342
Mobile: 617 460-1541

 

 

The dust hasn’t yet settled, but a few things about the new tax law seem clear. Employees will likely begin to notice a difference in their paychecks as early as February, and some projections put the average worker’s additional spendable income at about $2,000 per year.

What they will do with that income remains to be seen. While many will be tempted to improve their standard of living through purchases, you may be able to encourage them to take a longer view. As the increase in take home pay is beginning to kick in, now could be the perfect time to point out reasons to increase retirement savings. Better yet, it might be the right time to amend the plan to allow for automatic increases in deferral amounts.

Adding financial education sessions

An ongoing program of education about the retirement plan is key to helping employees make good choices to benefit their futures. But as the first significant change in the income tax law in nearly four decades takes effect, adding an extra employee educational session with your plan’s financial advisor could be a smart move.

Along with the discussion of increasing contributions and effective investment strategies, this could be a good time to discuss the relative advantages of pre-tax versus Roth contributions—if your plan offers a choice. With employees enjoying lower tax rates in 2018, they might benefit more from contributing to a Roth account in the 401(k) plan. In fact, because the new tax rates for individuals are set to expire in 8 years, now may provide a unique opportunity to build their Roth account without worrying so much about the tax consequences. If the tax rates revert later, employees can resume saving in their traditional pre-tax accounts.

Illustrating the potential impact of increased retirement savings requires several assumptions which, of course, should be thoroughly explained to employees. Even with the fine print, illustrations like the one here could encourage employees to save more for the future—and without feeling a pinch in their wallets.

Increased take-home pay: $100 per month, saved in the 401(k) plan
Average investment earnings: 8%
Current age: 40
Retirement age: 65
Additional savings in the 401(k) plan: $91,484.

MMA New England is a part of Marsh & McLennan Agency, LLC (MMA). Securities offered through MMA Securities LLC (MMA Securities), member FINRA / SIPC, and a federally registered investment advisor. Main Office: 1166 Avenue of the Americas, New York, NY 10036. Phone: (212) 345-5000. Variable insurance products distributed by MMA Securities LLC.  MMA and MMA Securities are affiliates owned by Marsh & McLennan Companies.