January 2018

Inside this issue:


People across the political spectrum have waited anxiously to see what would make it into the Joint Finance Committee’s unified version of the Tax Cuts and Jobs Act. Finally, the wait is over. This sweeping tax reform is poised to impact nearly every part of the American economy.

It’s Bigger Than a Bread Box

To pass the Senate with only a simple majority of votes – rather than a filibuster-proof supermajority – the tax bill needed to fit into the Senate’s reconciliation rules. Specifically, it could not increase the deficit beyond what’s been budgeted over a 10-year period. 

The Senate’s budget allows for a $1.5 trillion increase in the deficit, so, when working out the joint tax bill, it was crucial that the deficit increase stay within that limit. When the Congressional Budget Office released their cost estimate for the tax reform bill, it indicated that for the period from 2018 – 2027, the tax reform bill will reduce revenues by $1.649 trillion and will reduce spending by $194 billion, which leads to a deficit increase of $1.455 billion, just under the $1.5 trillion limit.

How Did They Do It?

In keeping their tax reform bill under the $1.5 trillion deficit-increase threshold, the Joint Committee on Taxation used every tool at their disposal — including implementing delays for some of the tax reforms and applying sunsets to others. The water gets pretty muddy fairly quickly, so let’s take a closer look at the key provisions

Personal Income Taxes

There are significant reductions to the personal income tax brackets effective for tax years 2018 – 2025, starting at the top and working down through the brackets. The standard deduction is doubled, while the personal exemption is eliminated. In an unexpected move, the individual alternative minimum tax (AMT) is retained, but with an increased exemption — designed to make the AMT apply to fewer taxpayers. 

In a nod to Senator Rubio’s urging, the tax bill also includes a doubled child tax credit, which has a larger refundable portion. In addition to doubling the standard deduction, the tax bill limits the state and local tax deduction to $10,000 and caps the mortgage interest deduction to debt of $750,000.

tax chart

The final tax bill also repeals the individual mandate under the Affordable Care Act, which means that there will no longer be a penalty applied to those who choose not to purchase health insurance. Some experts fear this repeal will lead to an increase in premiums and in the number of uninsured, thanks to individuals no longer being required to buy insurance. Opponents of the individual mandate point to the unstable marketplaces as evidence that the individual mandate hasn’t supported competition and growth to date.

Employers may see a slight decline in participation rates in their group health plans if employees choose to drop coverage when the mandate is removed.

In other news, the dependent care tax credit and the adoption tax credit – which were to be eliminated under the House version – survived the conference and will remain in their current form. Tuition assistance will also remain untouched, while parking and transit plans will see certain changes, including the elimination of the tax deduction for employer contributions to employees’ Section 132 plans.

Finally, the tax exemption for contributions to an employer-sponsored group health plan will remain untouched, which is considered a big win for employers and employees alike.

Corporate Taxes

Adjustments to the personal income tax rates aren’t as dramatic a change as the new tax regime for businesses. 

C corporations will see their income tax rate dropped from 35% to 21% — higher than the 20% rate originally included in the various drafts of the tax bill. Pass-through businesses will now get a 20% deduction applied to all taxable income, up to $315,000 of income (for married joint filers), which is phased out above that threshold. This deduction is also limited for professional service businesses. 

Unlike the individual AMT, the corporate AMT is fully repealed. In yet another departure from the changes on the individual tax side, these corporate tax amendments aren’t scheduled to sunset.

Estate, Gift and GST Taxes

The process of negotiating conformity between the House and Senate versions of the tax bill meant that, sometimes, it was the House’s version that set policy; other times, the Senate’s version was the final option. 
For the estate, gift and GST taxes, the Senate’s version of tax reform won the day. Under the final negotiated bill, the estate, gift and GST tax exemption amounts are doubled from $5 million to $10 million per individual, and indexed for inflation. 

This doubling of the exemption amounts applies from Jan. 1, 2018 – Dec. 31, 2025. On Jan. 1, 2026, the exempt amounts drop back down to $5 million, although they’d still be indexed for inflation. 


A lawsuit filed against Principal Financial concerning its traditional stable value product alleges that Principal serves as a plan fiduciary with respect to this product and violated its fiduciary duties by charging excessive fees. This case appears to have legs as it was recently certified as a class action on behalf of 41,000 investors

Stable value products are unique to retirement plans. Principal’s product is fairly typical of the industry:

  • This investment is governed by a guaranteed investment contract (GIC) entered into between Principal and the plan.
  • Principal sets the interest rate quarterly. Its contract does not specify an interest rate. Unlike most GICs, there is no floor on the rate declared.
  • The assets are invested in Principal’s general account. It offers a guarantee of principal and past interest payments backed by its general account.
  • There is a spread between the investment income generated and the amount credited to plan participants. This fact is stated in Principal’s annual shareholder report filed with the SEC. Principal does not reveal the amount of this spread.
  • There is a disclosed administrative fee associated with this product that ranges from 20 to 30 basis points.

The essence of the plaintiff’s argument is that the spread is an implicit fee charged to participants. Because Principal’s contract gives it the discretion to determine the crediting rate paid to participants, it is a plan fiduciary. Principal violated its fiduciary duties by setting its compensation and charging excessive fees. These facts present another issue. Whether the failure to disclose the spread violates ERISA’s fee disclosure rules under section 408(b)(2). Similar suits have been filed against Great West, Mutual of Omaha and MetLife.


Roth Basics
Elective deferral contributions to a traditional retirement plan are contributed on a pre-tax basis and help lower your current taxable income. Roth elective deferral contributions, however, are much like a Roth IRA in that contributions are made on an after-tax basis.  Money in the Roth account and any earnings will be distributed tax-free if withdrawn after age 59½, death, disability and at the end of the five-year taxable period during which the participant’s deferral is first deposited into the Roth account (a.k.a. the Five Year Rule). A Roth account can be rolled over to another plan that permits Roth contributions or to a Roth IRA. If rolled into a Roth IRA, the tax-free nature remains and the money is not subject to the minimum distribution requirement at age 70½ as in the Roth 401(k) / 457(b) / 403(b).

Who Would Likely Benefit?

  • People who believe taxes will be greater in the future
  • Young investors who believe they will be in a higher tax bracket in the future
  • Investors who do not qualify for the Roth IRA due to income limit
  • Low income investors who are tax-exempt
  • Investors who use Roth as a planning tool in conjunction with traditional pre-tax plans
  • Allows participants to hedge against risk of higher future tax rates

Who Would Likely Not Benefit?

  • People certain that future tax rates will decrease
  • People expecting to experience a significant drop in income upon retirement
  • People with high temporary income
  • People needing access to their funds within the first five years of deferrals
  Traditional 401(k)/457(b)/403(b) Roth
Tax treatment of deferrals Before tax After tax
Tax treatment of earnings Tax deferred Tax-free
Tax treatment of final distributions Taxable at ordinary
income tax rates
2018 402(g) Salary Deferral Limits *$18,500
(*Traditional + Roth)
(*Traditional + Roth)
 2018 Catch-up Limit *$6,000
(*Traditional + Roth)
(*Traditional + Roth)
Distribution Restrictions Subject to IRS rules,
qualified distribution
Subject to IRS rules, qualified distribution and Roth account must be open for five tax years


In summary, Roth contributions have potential to allow individuals more flexibility in saving for retirement, whereby giving investors more control over the taxable alternatives. Take a cautious approach when weighing the pros and cons.


No strategy assures a profit or protect against loss.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

For Plan Sponsor use only – Not for use with Participants or the General Public. This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. 

Montgomery Retirement Plan Advisors does not warrant and is not responsible for errors or omissions in the content of this newsletter.

Montgomery Retirement Plan Advisors offers investment advisory services through Independent Financial Partners, a Registered Investment Advisor. Independent Financial Partners and Montgomery Retirement Plan Advisors are separate entities.

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Montgomery Retirement Plan Advisors offers investment advisory services through Independent Financial Partners, a Registered Investment Advisor. Independent Financial Partners and Montgomery Retirement Plan Advisors are separate entities. may only discuss and/or transact securities business with residents of the following states: Florida, Texas, California, Nevada, Ohio, Tennessee.