October 19, 2020 - Douglas Myser

Bidens retirement plan changes. Presidential candidate and former Vice President Joe Biden recently proposed a key change to the employer-sponsored 401(k) plan that could help lower  earners save for retirement. But this proposed change also would likely reduce the financial benefit of a traditional 401(k) for high earners, say experts, possibly encouraging more to take advantage of the Roth 401(k), an after tax plan. Currently, the traditional 401(k) plan allows workers to contribute money to their accounts on a pre-tax basis, meaning that they don't pay taxes on any income put into the plan. Workers can enjoy tax-deferred growth on their investment until retirement, and are only taxed until retirement, and are only taxed when they withdraw money from the account at retirement age, currently 59 and a half. The maximum contribution is $19,500 for 2020, but workers ago 50 and over can contribute an additional $6500. Bidens retirement plan changes.

"The higher your tax bracket, the more benefit you get for contributing the same amount of money," says Kelly Campbell, chairman and CEO of Campbell Wealth Management, in the D.C. area. At current IRS tax rates, high earners can save as much as 37 percent of their contribution in taxes. Compare the value of a contribution of $19,500 to high earners and low earners. "Someone in the 37 percent bracket will get a tax savings of $7,215," says Campbell. "For someone in the 10 percent bracket, that same $19,500 contribution will receive a $1950 tax benefit."

Bidens plan would shake up this situation, giving everyone a percentage tax credit based on how much they contribute. While the loans and exact amounts are not fully detailed, initial estimates put the tax credit at about 26 percent of a workers contribution. This approach helps equalize the disparity created by the current deduction approach. Experts predict that if Bidens plan were implemented, many high earners would move to a Roth 401(k) plan.

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