“If a particular household is now facing lower marginal tax rates under the new laws, that scenario could make Roth accounts more attractive, particularly if there is some expectation that overall rates will rise prior to retirement,” said O’Doherty. “The optimal policy for most households, however, is still to—one, utilize tax-advantaged accounts for retirement savings and, two, diversify between traditional and Roth accounts.”
Brown notes one important implication for retirement asset location in the wake of tax reforms: Starting in 2018, savers and advisors will no longer be able to recharacterize their Roth IRA conversions. Roth conversions often happen amid tax uncertainty, so advisors were able to recharacterize some of the money converted from a traditional account to a Roth IRA back into a tax-deferred account to avoid pushing their clients into a higher tax brackets. With the elimination of recharacterization, the process for Roth conversions becomes riskier.
“My guess is that Congress did this to encourage more frequent conversions, which would solve a short-term revenue need, but it’s not clear that investors will respond how they might be expecting,” said Brown. “I’d imagine fewer conversions will occur because the investor is locked in if they choose to convert to a Roth account.”