There is no need to rush out of such savings vehicles before the end of the year, advisers say. But they recommend that parents using Clifford Trusts or similar income-shifting vehicles eventually transfer those funds into tax-exempt securities such as municipal bonds, into growth stocks that they intend to hold as long-term investments or into U.S. savings bonds, which are exempt from state and local taxes and are not federally taxable until they are cashed in.
Bonds, in general, are much more attractive investments under the new tax law than they were before. The lower individual tax rates will increase the after-tax returns of taxable bonds.
And, although lower personal tax rates in effect cut the after-tax value of tax-free municipal bonds, those bonds are proving particularly popular because they are one of the last remaining tax-favored investments. This is particularly true in California and other states with high state income taxes.
Tax advisers caution, however, that tax-exempt bonds might not be a good investment for those who expect to be in a much lower tax bracket in 1987 or 1988.
Retirement-savings strategies will also have to be reviewed.
Curbs on IRAs
Under the new law, employees with adjusted gross incomes above $40,000 ($25,000 for single persons) will lose some or all of the $2,000 deduction for IRA contributions if they are covered by pension plans at work. Tax-deferred contributions to the popular 401(k) savings plans will be limited to $7,000 a year, down from $30,000 now.
Because the new law still allows interest earned on IRA contributions to build up tax free until the money is withdrawn, many advisers are urging savers who are losing the deduction to keep pouring money into IRAs anyway. But the recommendation is not universal.
"If people just need the discipline of regularly saving money," said Shearson's Plumeri, "they might be better off considering a supplemental retirement fund."
Paying Off Debts Urged
How consumers borrow money also is likely to come under review. Because the consumer interest deduction is being phased out, financial advisers are urging investors to pay off all debts except home mortgages--the interest on which remains fully deductible--and, if necessary, to take out new loans backed by the equity in their homes. Interest on those loans remains deductible, within certain limits.
Specifically, an interest deduction is permitted on loans equal to the original purchase price of the home plus an additional allowance for home improvements. And the borrowing ceiling is raised by the amount of loans taken out to meet medical or college expenses.