I was following someone who either mistakenly never turned off their left turn signal or wanted me to know blocks in advance they were turning. I suspected the former but was prepared for the latter. I ended up turning before they did.
We regularly get signals from Washington. Some of those are things on which we should prepare to act, and some we may need to ignore. Distinguishing between the two is meaningful, determining what to do about them is essential.
There are a few things that, regardless of your party affiliation, based on demographics and determination, you should expect to happen over the next several years. The timing of when they will occur is difficult to know, but the probability of them occurring is quite high. Let me lay out a couple of these and help you plan for what to do about it.
While we can argue all we want about the Affordable Care Act (ACA), we are on an inexorable march to universal health care. There are a number of reasons for this inevitability.
First, most of the aging population, through Medicare, is already on such a system.
Second, the 30-and-under sect are working free agents. They are more accustomed to job change then the baby boomers have been.
When you couple their itinerancy with a potentially increasing gig economy (cobbling together a variety of jobs in order to make a living rather than the more traditional way), they will need to provide for their own health care because they don’t have a stable employer providing it. Health care will be a big issue to garner their votes.
Last, we saw how difficult it is to take away a perceived benefit from those holding it with the recent shenanigans around repeal and replace the ACA. While universal health care is a foregone conclusion, the costs of such a system are still difficult to calculate. Some level of consumer cost control will also be part of the program and more costs are likely to be borne by those with higher incomes (again, look at current Medicare pricing as a clear signal for this).
Given the signal on health care, this makes long-term worrying about whether you will have health coverage unnecessary, although short-term things may feel jarring. Republicans and Democrats will want to control costs so the fighting will be around access limitations.
Private insurance or concierge services will exist for those who can afford it. Universal health care will make people less tied to their employers.
Another clear signal out of Washington is tax reform. Forget the tax-the-rich rhetoric and focus on the areas of agreement. As long as we don’t have a flat tax, it is hard for either party to argue with raising the standard deduction so fewer people can itemize.
As fewer people itemize their deductions, the political incentive for maintaining all those deductions is reduced. Therefore, look for the mortgage interest deduction to be played with. There already is a limit on the mortgage interest deduction, so reducing it further is not very heavy lifting. Eliminating the state tax deduction also gets easier as fewer people itemize. This one is more difficult to swallow, though, because even in blue states, a number of Republican members of Congress may have difficulty supporting this.
A reduced mortgage interest deduction will have a variety of potential impacts. The rent vs. buy decision becomes murkier. Retiring with a mortgage is less useful because the after-tax benefits are diminished. Aggressively paying down longer-term adjustable rate mortgages becomes beneficial.
The Roth IRA
If deductions are limited, tax rates could also fall. This is extremely important for planning with one universally loved item — the Roth IRA. Remember, a Roth IRA or Roth 401(k) is where you pay tax on the money going into the retirement vehicle in return for tax free growth and not paying taxes when it comes out. Many people get blinded by the amount of growth that can eventually come out income tax free.
Simply put, the Roth IRA is great if you are in the same or higher tax bracket in retirement.
It works if you have a large estate and wish to pay income tax today rather than estate tax tomorrow so your children can have a larger inheritance, but estate taxes have been dropping as well. Many view the Roth as a no-brainer. It isn’t. It can make sense as a tool in your arsenal, but it definitely should not be the only one.
For example, if you are in the highest tax bracket today, using a Roth 401(k) or converting assets into a Roth is questionable.
More important, if you are a Minnesota resident today but don’t plan on being one tomorrow, you are paying an extra tax burden that you won’t have in the future. Roth contributions make the most sense for those in lower tax brackets. If you are just starting out and in a low bracket, Roths are ideal.
If you are retired and in a low tax bracket, regularly converting IRA money to a Roth to fill up that low bracket (as long as you pay attention to the Medicare limits) is also a terrific strategy. But Washington is signaling that Roths are not for everyone.
When you watch closely for signals, you will have a good idea of when things are turning and take advantage of the change.
Ross Levin is the chief executive and founder of Accredited Investors Wealth Management in Edina.