As with most new presidents, President Joe Biden entered the White House with a plan, and a list of goals he wanted to accomplish during his time as president. One of his goals is to make changes to the 401(k)-retirement savings plan to equalize access and benefit for retirement planning. As it stands, 401(k) contributions are treated as a tax deduction, which brings greater benefit to those who are higher earners. Individuals whose employers do not offer a 401(k)-retirement plan are out of luck. Nontraditional income earners or individuals who take time to care for an ill family member or friend may sacrifice time contributing to their retirement.
Under President Biden’s proposed 401(k) plan, these things would change. The tax deduction would be replaced as a tax credit, reducing the tax break enjoyed by the wealthy and allowing the middle and lower class to have an increased benefit. An automatic 401(k) would ensure all employed individuals have access to contribute to this retirement plan, regardless of employer participation. Further, caregivers would have an opportunity to catch-up on missed 401(k) contributions. Overall, President Biden’s proposed changes to the 401(k) program seek to equal the playing field, allowing everyone to have equal access, opportunity, and benefit to planning for the future.
What are President Biden’s proposed changes for the 401(k) plan?
The proposed changes aim to level the playing field, by reducing the benefits in place for higher earners and increasing access and benefits to those who earn less. President Biden wants to eliminate the 401(k)-tax deduction and replace it with a tax credit to benefit all workers who contribute to a 401(k). In addition to this change, he proposes a further tax impact by reducing the tax advantage for high earners and increasing the impact for low and middle earners. For those who do not have access to a workplace retirement account, President Biden proposes the creation of an automatic 401(k) to ensure all workers have access to this resource. Finally, President Biden wants caregivers to have the opportunity to make catch-up contributions to retirement accounts.
How would the proposed 401(k) changes affect me?
Under the current law, 401(k) contributions are pre-tax dollars, which means when it comes to saving for retirement, your taxable income is reduced by the amount you contribute to your retirement account, and therefore, your tax liability is lessened through a tax deduction. Instead of the current tax deduction that is based on the percentage of the salary, you invest in your 401(k), President Biden’s proposed tax change would create an equal tax break for everyone, regardless of your income. This is because the current percentage-based tax break varies. After all, individuals are taxed at different percentages according to their income bracket. Under the President’s proposed plan, everyone would see a tax credit of somewhere around twenty-six percent, regardless of whether you make a five-figure salary or a six-figure salary. This scheme changes a bit if you are working toward consolidating your debts, so be sure to reach out to a financial professional to determine what this means for you.
If you do not have access to a 401(k) plan through your employer, you are missing out on the benefit of the tax break. With President Biden’s automatic 401(k), individuals who do not have a work-sponsored 401(k) will be able to contribute to an automatic 401(k) which would then allow the individual to also benefit from the tax credit for those contributions made to their retirement account.
As an individual who earns a higher income, you might benefit from shifting your retirement contributions from a traditional 401(k) to a Roth account, being taxed on the front end rather than taking the tax credit now and paying tax upon withdrawal. As an individual who has a middle or lower income, you have a greater incentive to contribute to your retirement account, especially if the tax credit is refundable which means you will see more money in your pockets at tax time. However, even if it is not refundable, the tax credit would still decrease your tax liability up to the amount you may owe to the government.
Small businesses may also be incentivized to offer retirement plans, which could give you access to the benefits of a 401(k) even without President Biden’s proposed automatic 401(k). Though, there are not many details on what kind of perks President Biden is prepared to offer for businesses who can support 401(k) plans for their employees. Still, the automatic access proposal would ensure all working individuals will have opportunity and access to contribute to a 401(k)-retirement plan, allowing everyone to see the benefit of proposed tax credits for contributions. This will encourage more people to save for the future, especially the middle- and lower-income earners who would otherwise avoid contributing to keep more money in their pockets now.
Will the President’s proposal become law?
Getting into the White House was the first step, but President Biden’s proposed 401(k) changes must still be considered and approved through the legislative and regulatory processes before the changes could become law. This could take a while. There are two other bills up for consideration that could also bring changes to the way retirement savings operate in America. The Securing a Strong Retirement Act of 2020 and the Retirement Security and Savings Act also aim to increase retirement savings. So, while it is likely to see changes to the retirement planning process over the next year, exactly how these changes will come about remains to be seen. President Biden’s proposal may evolve and mesh with existing bill proposals to create something new or bits and pieces of each could be adapted. Ultimately, it is important to stay apprised of the subject to ensure you are taking full advantage of your retirement planning options and receiving the full benefit of your participation in such planning.
