September 19, 2020 - Douglas Myser

Will biden change your retirement plans. It's an election year and you know what that means: Proposals are cropping up from both sides of the aisle that promise to make your life easier. One, supported by the Biden-Harris ticket, is a change to the tax rules for 401 (k) retirement plans. Given that roughly half of Americans are participating in a workplace sponsored retirement plan, the proposed tax adjustments aren't tiny changes that only affect the wealthy. So the big question is, if Biden can put his plan into action, how much it would affect you ? Biden is proposing to equalize the tax benefits for 401(k) contributions across income levels.  TO understand what that means, it helps to revisit how those tax benefits work today. Under current rules, your 401(k) contributions are made with tax free dollars. The amount you save by not having to pay taxes on those contributions is dependent on your tax bracket. If you are in the 22% tax bracket, you save $0.22 for every $1 you contribute. But if your marginal IRS tax rate if 37%, you save $0.37 for each $1 contributed. Will Biden change your retirement plans.

In 2018, Ben Harris, an advisor to Biden, published an article in The Wall Street Journal on reforming 401(k) rules. At the time, Harris said, "Rather than making the subsidy dependent on tax rates, savers should get a transparent upfront credit for putting money into a retirement account--say of 25% of contributions." While Biden's 2020 proposal hasn't specified the rate he'd recommend for the tax credit, some sources speculate that it could be 25% or 26%. A 25% flat rate applied across the board on contributions would raise the tax benefit for lower income individuals. Politicians float tons of big ideas before elections, and many of those ideas will either evaporate into thin air or get reworked into something different. The Biden proposal is not different. If it does get pushed through in its current form and you are one who will benefit--great.

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