by Zac Majors
Biden’s Tax Plans – How It Will Affect My Retirement
President Joe Biden is trying to change the retirement game with the goal of encouraging people to save more, while repealing tax cuts implemented by the Tax Cuts and Jobs Act (President Trump).
The biggest change is in the tax preferences for savings and retirement accounts. As you know, workers and organizations alike contribute to 401(k) or 403(b) plans only to pay taxes on when withdrawing from these accounts. This break used to be much more valuable for high income earners, considering they had to pay more tax on their income.
Biden’s tax plan aims to award tax credits against how much is saved, offering an incentive to lower and middle-income individuals to save more and earn those credits. These credits will be in place of the tax deduction for contributing to the plan. High earners would get less of a tax break on their 401(k) savings while middle and low earners would get a bigger relief, thus leveling the playing field.
If Biden’s 26% tax credit proposal gets approved from the Congress, if an individual is earning $120,000 per annum (falling in the 24% tax bracket), and contributes 10% to their 401(k) plan, they will receive 26¢ per dollar. Against $12,000 contributions, they would be receiving $3,120 as credits.
On the other hand, if a person earns $50,000 per year and saves $5,000, they would also receive a 26¢ per dollar credit ($1,300), thus saving more than double of what they’d be saving on taxes in the current regime.
Impact on Retirement Plans
The plan is currently facing a lot of opposition, particularly from portfolio/fund managers and investment management companies. However, if we look at the overall climate in the White House, Congress, and the response this plan is getting, there is a very good chance that this bill will be passed.
Regardless of whether the plan gets approved or not, retirement advisors across the board are suggesting that their clients evaluate their current retirement plans. We would advise that you start considering including a Roth 401(k) or Roth IRA into your plan, if your income allows.
To learn more about 401(k) plans, how to pace your assets and expenses with respect to the new regime, or simply to get help reviewing your retirement plan, we recommend you get in touch with Centric today! We can help you understand the intricacies involved with your plans, along with determining the best move for a financially secure future.