When a presidential election produces a big change, such as last November’s surprise victory by Donald Trump, it’s safe to assume the ripple effects will be felt in everything from foreign policy to financial planning.
Few sectors in American society are more sensitive to change than people in or nearing retirement. Right now, they’re eager to know what the new presidency could mean for their retirement savings.
Right now you might be thinking, what retirement savings? If so, you’re not alone. Nearly half of Americans haven’t set aside any money for retirement. Another 23 percent have less than $10,000 socked away. And eight in 10 people believe they won’t have enough saved up when the time comes.
One reason is that many people don’t have easy access to a retirement plan. Fewer than 60 percent of private-sector workers are offered a retirement plan through their employer. That means nearly half of U.S. employees are left to seek out and invest in a retirement account of their own.
A traditional or Roth IRA provides an avenue for creating your own retirement plan—or supplementing the one provided by your employer. If you’re considering what type of IRA might be right for you, there are a few things you should know about saving for retirement during a Trump administration.
For starters, both President-elect Trump and House Speaker Paul Ryan have proposed tax reforms that could lead to big changes in the nation’s tax policy. “Both promise the lowest tax rate since before World War II,” says Forbes. “Overall, we should expect that a Trump presidency will usher in lower personal and business taxes for most Americans.”
But what do taxes have to do with saving for retirement? The short answer is: everything.
1. Roth IRAs could become the top choice for retirement savings.
For individuals who are contemplating whether to open their own IRA, the biggest decision to make is typically whether you want your contributions to be pre-tax.
There are two types of IRAs: traditional and Roth. A traditional IRA lets you use tax-deferred money, which means instead of paying income taxes on it now, you pay them down the road when you start making withdrawals. With a Roth IRA the tax advantage comes later, when you’re able to withdraw your investment tax-free. Learn more about the difference between traditional and Roth IRAs.
Since contributions to a traditional IRA are tax-deductible in the year you make them, people often choose them to help offset their tax burden year after year as they build their retirement savings. But if Trump’s proposed tax cuts lighten the load for millions of Americans, more people could start gravitating to Roth IRAs.
Why? For starters, if tax rates drop to historical lows, they’re bound to go up again eventually. So you may be better off paying the taxes on your retirement contributions now, while the rates are low, rather than a decade or more down then road when tax rates have gone up again.
“Weighing the financial loss of a current income tax deduction versus the super benefit of tax-free growth in a Roth IRA should make Roth contributions the popular choice for more Americans than ever before,” says tax attorney Adam Bergman.
2. Social Security could suffer.
Many people who fail to save for retirement figure they can fall back on Social Security when the time comes. After all, more than a third of American adults over 65 are completely dependent on these benefits, while another 63 percent rely heavily on them.
But young Americans have long been warned not to assume that the current Social Security program will be there for them when they retire. By 2034, the program will be able to cover only 77 percent of the promised benefits.
While President-elect Trump has made it clear that he doesn’t plan to cut Social Security benefits, the Republican-controlled Congress already has indicated an interest in modifying the existing benefit program. And the proposed tax cuts, if adopted, could have a big impact on the program. “If they create wide deficits, as analysts have predicted, that could put long-term financial pressure on the Social Security program, which faces a shortfall in 18 years when the Baby Boom generation is fully retired,” Bergman says.
Regardless of what happens in the next four years, it’s clear that today’s workers can’t be sure that Social Security will provide the same level of retirement income that it does currently. Now, more than ever, it’s critical to start planning for retirement.
3. Investing in an IRA could get even easier.
There are a lot of rules governing retirement accounts that can make them confusing for people who are seeking an investment plan on their own. Lawmakers have broadly acknowledged that some aspects of the U.S. retirement system just aren’t working well.
“Members of Congress have made several proposals, some bipartisan, to fix these issues, and a few could be enacted under a new president and Congress,” Bergman says. “None is likely to have a dramatic effect on Americans' retirements, but these efforts could at least make it less of a hassle to run a retirement plan or save in one.”
Though a new administration in Washington adds to the uncertainty faced by people planning for retirement, it’s important to stay focused on the planning process. By seeking advice from knowledgeable sources, such as the professionals at Oregon Community Credit Union, you can feel secure and in control as you prepare for the future.