Overview: How Will Tax Reform Affect Investments? | Lord Abbett

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Retirement Perspectives

Although not the target, some investments will be affected by the Tax Cuts and Jobs Act.

On December 22, 2017, President Trump signed into law H.R. 1, known as the Tax Cuts and Jobs Act, which makes widespread changes to the Internal Revenue Code and contains a large number of provisions that affect individual taxpayers. Almost all of its provisions, including a lower corporate tax rate of 21% and lower individual income tax rates, went into effect on January 1, 2018.

However, to keep the cost of the bill within Senate budget rules, all of the changes affecting individuals expire after 2025. At that time, if no future Congress acts to extend the law’s changes affecting individual tax provisions, those provisions would sunset, and the tax law affecting individuals would revert to its current state.

The taxation of investments was not the primary purpose of U.S. tax reform, but individuals should take note of the following items:

  • Under the old law, long-term capital gains and qualified dividend income were taxed at a rate of 0%/15%/20% depending on your income tax bracket. The new tax reform bill maintains the same tax rates, but because the bill changes the income tax brackets, the rates are now based on specific income thresholds that generally align with the old income tax brackets. The result: no change.
  • The net investment income tax surcharge of 3.8% for higher income earners also has not changed.
  • Initial proposals by the Senate included the requirement to use first-in first-out (FIFO) accounting when selling a security that was purchased at different times. This provision was removed, resulting in investors continuing to have the option to choose which security lot to sell rather than having to sell the lot purchased first. The result: no change.
  • Under the old law, you could convert a traditional IRA into a Roth IRA and pay income taxes on your earnings. You can still do that. But you also had the option to undo this conversion within a certain period of time. This so-called “recharacterization” option has been eliminated. There are no more do-overs.
  • Distributions from a 529 plan used to be used only for higher education (college) in order to be exempt from income taxes. Today, you may also use up to $10,000 per year to pay for elementary and secondary education tuition expenses.
  • Under the old law, investment fees and expenses were deductible as a miscellaneous itemized deduction subject to a 2% of adjusted gross income floor. Today, all miscellaneous itemized deductions have been eliminated.
  • The municipal bond interest tax exemption is staying. As a result, demand for the tax exemption of municipal bonds should increase with fewer alternatives, especially among those investors residing in higher-tax states, such as California and New York, because of the cap on state and local tax deductions.


The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. Investors should consult their tax advisors as to what strategies might be appropriate for their circumstances. All investments involve risks, including possible loss of principal.

Glossary of Terms

Traditional IRA contributions plus earnings, interest, dividends, and capital gains may compound tax-deferred until you withdraw them as retirement income. Amounts withdrawn from traditional IRA plans are generally included as taxable income in the year received and may be subject to 10% federal tax penalties if withdrawn prior to age 59½, unless an exception applies.

A Roth IRA is a tax-deferred and potentially tax-free savings plan available to all working individuals and their spouses who meet the IRS income requirements. Distributions, including accumulated earnings, may be made tax-free if the account has been held at least five years and the individual is at least 59½, or if any of the IRS exceptions apply. Contributions to a Roth IRA are not tax deductible, but withdrawals during retirement are generally tax-free.

529 plan is a tax-advantaged investment vehicle in the United States designed to encourage saving for the future higher education expenses of a designated beneficiary.

The information provided herein is not directed at any investor or category of investors and is provided solely as general information about our products and services and to otherwise provide general investment education. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as Lord, Abbett & Co LLC (and its affiliates, “Lord Abbett”) is not undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity with respect to the materials presented herein. If you are an individual retirement investor, contact your financial advisor or other non-Lord Abbett fiduciary about whether any given investment idea, strategy, product, or service described herein may be appropriate for your circumstances.

The opinions in the preceding commentary are as of the date of publication and are subject to change. Additionally, the opinions may not represent the opinions of the firm as a whole. The document is not intended for use as forecast, research or investment advice concerning any particular investment or the markets in general, and it is not intended to be legal advice or tax advice. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information.


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