Information moves quickly in the era of social media, but this also means that misinformation spreads just as quickly, if not quicker. Some social media posts have been circulating the claim that Joe Biden plans to tax Americans’ 401(k) savings.
However, there is no evidence that Biden has made this claim, nor does his campaign platform reference a tax on 401(k) accounts. So, how might the Biden presidency affect your 401(k)? Through tax credits.
Biden’s tax plan for 401(k)
Biden has proposed a plan to balance out retirement tax benefits to apply more equally across different income levels. This would come in the form of replacing the deduction for retirement account contributions with a 26% refundable tax credit.
Currently, people who invest in a 401(k) account get to deduct their contributions from their annual taxable income. This system tends to benefit higher income earners because they can save more and deduct more.
For example, a person with $8,000 of taxable income is subject to 10% income tax rate. If they contribute $100 to a retirement account, they can save $10 in taxes. A person with $550,000 of taxable income is subject to a 37% tax rate. If this person contributes $100 to a retirement account, they save $37 in taxes.
Under Biden’s plan, people earn a 26% refundable tax credit directly into their retirement account instead of a deduction. This is a flat benefit for contributions instead of a benefit that scales in proportion to income. In summary, this provides larger benefits for taxpayers in lower brackets but will reduce benefits for taxpayers in higher income brackets.
It is this latter effect that has some people upset. Although there is no tax on their 401(k) accounts, it may feel like they are being “taxed” because they will not receive as many benefits as they have up until this point.
Talk to a ProVise CFP® professional about your 401(k) savings
Biden’s tax credit proposal could spell big changes for your 401(k) savings strategy. It may be challenging to adjust without saving too much or too little during this period. You should find a financial professional who can work close with you to help you adjust your plan for any changes that Biden may bring with his presidency.
At ProVise Management Group, our CERTIFIED FINANCIAL PLANNER™ professionals can get to know you and your current financial circumstances, goals, risk tolerance and personal values to help you develop a plan that works for you. We can also create a written plan for you at a fiduciary standard of care. All our written plans come with an unconditional money-back guarantee. If you are unhappy with your written plan, you can return it to us, and we will refund 100% of the fee paid.
Are you ready to talk to a professional about planning for your retirement? Contact ProVise today to schedule a complimentary consultation.