How to Maximize Your Savings Under the New Tax Law

After much anticipation, the Internal Revenue Service in December announced revisions to the U.S. tax law, including some major changes for those filing individually. While these changes won't affect the way you file this tax season, you should be aware of a few notable adjustments to the law that could benefit you in the year ahead.

Here are a couple of things to keep in mind.

Use tax-favored accounts to the fullest. One of the more imminent and noticeable changes is that many working Americans could see a bump in their income as their employers start using the new IRS income tax withholding tables. This is because the new tables may reduce the federal tax withheld from one's take-home pay.

If you find yourself with more money in your paycheck, you could use those extra funds to boost your savings. For example, you might consider increasing contributions to your 401(k) or other employer-sponsored retirement plan. Or, as the tax cuts lower tax brackets through 2025, you could put your additional take-home pay toward a tax-advantaged traditional individual retirement account.

[See: 7 Things That Can Derail Your Retirement Investing.]

Contributing more to your health savings account, if available to you, is also worth looking into. The tax benefits of HSAs, including pre-tax contributions and tax-free withdrawals for qualified medical expenses, make this account a popular savings vehicle for future health bills, particularly in retirement. After all, many people see their health care costs rise later in life.

If you haven't already, the new tax law should warrant a check-in with your tax advisor to evaluate your withholdings. While you might be taking advantage of the changes today, if you withhold too little this year, you could be faced with a surprisingly large tax bill at the end of 2018. Regardless of your scenario, now is an opportune time to review and update your strategy so you're better prepared for the year ahead.

What about Roth re-characterizations? Another notable change is the elimination of recharacterization for Roth IRAs for the 2018 tax year.

Unlike many traditional retirement accounts, which require that you begin withdrawals at age 70½, Roth IRAs don't have any withdrawal requirements during your lifetime and enable you to save during retirement, within maximum contributions (check the IRS website for limits). Because of this benefit, many Americans choose to convert their traditional IRA -- or pre-tax 401(k), 403(b) or 457(b) assets -- into a designated Roth account. This is known as a Roth conversion.

After making this conversion in years past, consumers were permitted to revert back to their original account through a process known as recharacterization. They might choose to do this if the value of their investment declined since the time the conversion was made, or they simply changed their mind.

If you have converted to a Roth and are thinking about recharacterizing, the window to do so is closing quickly as the new tax law eliminates this strategy beginning in the 2018 tax year. The recharacterization process needs to be completed by the last date for filing or refiling a prior-year tax return, which is typically on or near Oct. 15.

Keep in mind that this decision does not have to be all or nothing. You may find that dividing your savings among Roth and traditional IRAs and a Roth or traditional 401(k) is the optimal solution. Working with a financial professional can help you make the right decision based on your individual needs and goals.

[See: 11 Steps to Make a Million With Your 401(k).]

More flexibility to save for your child's future. There were also changes that expand the flexibility to save for your children's future education, including 529 college savings accounts.

Previously, withdrawals on funds accrued within these plans were considered tax-free if the money was used toward qualified higher education expenses (e.g.: tuition or room and board) at any eligible post-secondary institution. With the new tax bill, these accounts have recently been expanded to include elementary and secondary school expenses.

While this could present an opportunity for greater adoption of 529 plans, these plans are administered by states and not every state law will automatically comply with the new rules, so families should understand the restrictions and limitations. Ultimately, to get the most out of your plan, remember to start early and save often, allowing the account the potential to accumulate tax-free over time.

It is also now allowed to transfer funds within a 529 college savings account to an ABLE account, without incurring any tax or penalty. These accounts provide tax-favored savings for people with special needs or those who are living with a disability without affecting eligibility for programs like Medicaid and Supplemental Security Income.

Now, parents who may have saved in a traditional 529 plan as an option for accumulation and funding education have two options with the addition of ABLE accounts. If they have a child with special needs they can set up an ABLE account that covers not only education expenses, but all disability related expenses. The additional flexibility in the new tax law creates another option for parents who have already started saving in a traditional 529, allowing them to roll funds into an ABLE account if one of their children qualifies.

Plans to implement the new legislation could vary from state to state, so it's important to get information about your state's specific offerings. An ABLE account can be a useful instrument for families with special needs, but there are many considerations with all aspects of special needs planning. It requires a network of experts, and families should seek out a knowledgeable, qualified financial advisor with experience serving clients in this space.

No matter what regulatory changes may occur now or in the future, remember to remain focused on your long-term financial goals. Meet regularly with a financial advisor and talk to a tax specialist who can each offer you personalized advice on how to best to save for retirement and minimize your tax liability respectively. Getting professional advice and guidance early on can help you avoid the need to make up lost ground in the future.

[See: 8 Ways to Buffer Your Portfolio From a Market Slide.]

Disclosures: Investment adviser representative and registered representative of, and securities and investment advisory services offered through, Voya Financial Advisors, Inc. (member SIPC). These materials are not intended to be used to avoid tax penalties, and were prepared to support the promotion or marketing of the matter addressed in this document. The taxpayer should seek advice from an independent tax advisor. Neither Voya® nor its affiliated companies or representatives provide tax or legal advice. Please consult a tax adviser or attorney before making a tax-related investment/insurance decision.