How Trump’s Tax Plan May Affect You and Your Clients

There are three things that are certain in life:  Death, taxes and tax law changes. 

On Friday, January 20th, 2017 Donald Trump will become the 45th President of the United States of America.  All politics aside, what does this exactly mean for you and your clients?

As it pertains to our industry one of the biggest agenda items in Trump’s one-hundred-day plan is comprehensive tax reform.  While the plan he outlined is merely a starting point it does provide us insight into what may possibly occur.  Under Trump’s proposal three major taxes would disappear:  federal estate taxes, the 3.8% Medicare surtax on investment income, and the AMT (Alternative Minimum Tax).  Additionally, the federal marginal tax rates would also be lowered and streamlined.  Currently there are seven marginal tax brackets ranging from 10% to 39.6%.  If Trump’s plan comes to fruition there would be just three:  12%, 25% and 33%.  Furthermore, there would be a cap on itemized deductions ($100,000 maximum for single filers and $200,000 for married) as well as an increase on the standard deduction amount ($15,000 for single and $30,000 for married). 

So what does this mean for us?

To specifically address lower tax rates this may cause traditional retirement accounts such as 401(k)’s and IRA’s to potentially fall out of favor.  The reason being is 401(k)’s and IRA’s are specifically designed to defer income for today’s tax dollars.  With a lower tax rate the implied benefits of tax savings would be significantly reduced.  For example, assuming a $10,000 401(k) contribution the “tax savings” would be $3,960 at the current top marginal tax rate.  However, if Trump’s tax plan comes through, the “tax savings” would drop to $3,300, which is a 20% decrease.  Something critical to point out is in both situations we really aren’t saving taxes, but instead merely deferring taxes to a future date with an unknown tax rate.  Essentially we are kicking the can into an unknown future where tax rates may in fact be higher.

With the potential tax rate drop and uncertain future tax rates Andy Friedman of the Washington Update believes retirees should plan for something called “tax volatility.”  Andy, a former tax attorney and past LifePro Summit and LifePro University keynote speaker, stated investors “should maintain liquidity in both taxable and tax-deferred accounts and in taxable and tax-free investments. That way they can withdraw funds from one or the other depending on whether it makes sense to pay taxes that year (and if so whether to pay at ordinary income or capital gains rates),” Friedman adds. “Preparing for tax volatility allows an investor to take advantage of tax changes, whichever way they might go.”

Andy Friedman’s comments echoed what we at LifePro have been saying for years.  Due to future tax rate uncertainty, our clients should add ‘tax diversification’ in their overall comprehensive retirement plan by making sure they have an adequate mix of dollars inside their taxable, tax deferred and tax free buckets.  We make sure our clients are properly diversified in various asset classes (stocks, bonds, real estate, annuities, life insurance, etc.).  Why not take the added step to also diversify tax types?  This is one of the foundational concepts we teach in the LifePro Wealth Builder IUL selling systems. In fact, financial experts across the country are making similar statements that the new Trump Tax Plan could mean vehicles like Roth IRA’s, Roth 401(k)’s and cash value life insurance may be more appropriate for some investors.   

What do industry experts anticipate?

They are saying the income tax deduction from a 401(k), or traditional IRA, provides less value in a low tax rate environment, particularly when the deferred income may be taxed at higher future tax rates.  While we can’t be certain tax rates in the future will be higher, we can look at data from the best and brightest who believe we as a nation are on an unsustainable path with trillions of dollars in debt coupled with trillions in unfunded future liabilities.

Another popular LifePro keynote speaker, David Walker, former Comptroller General of the US and head of the GAO for a decade, stated government debt “is not just a financial issue.  This is not just an economic issue.  This an ethical and a moral issue.  We are mortgaging the future of our kids and grandkids at record rates.”  David Walker, essentially the top accountant for the US Government, has intimate knowledge of our governments spending, budget and debt.  In fact, he once said “we are heading to a future where the US Government will be forced to either cut spending by 60% our double federal tax rates.”  Regardless of what Trump or future administrations proposed, they are all inheriting the same math problem in which there are only two solutions:  Spend less, increases taxes, or some combination thereof. 

What's next?

While the Trump plan may reduce taxes over the next 4 to 8 years we must look at the bigger picture.  Just like a client who is stuck in the repetitive debt cycle, we as a country must first come to terms with our current situation and then act decisively.   As advisors we also share some of this burden.  It is not just our job, but it should be our mission, to help educate our clients and prospects on the importance of tax volatility and tax diversification.  Just like David Walker, we believe we have an ethical and moral obligation to share this information to as many people as possible in hopes we can help lead them down the right path.  More than ever our clients are looking for clarity and confidence in these uncertain times which only you can provide.

Attend the LifePro Summit 2017

Please join us on February 28th in San Diego for the 2017 LifePro Summit for more insight into the importance of tax diversification for your clients.  This will be a jam-packed day filled with motivation and education from some of the nation’s leading authorities and top advisors. 

LifePro Summit Details

About Brian Manderscheid

Brian Manderscheid is the Vice President of Case Design at LifePro. He works with financial professionals designing advanced case illustrations that are built for longevity and are always in the best interest of the client.