Biden’s Plan To Overhaul 401(k) is more misleading strategy

Do you think it’s startling that people who pay the highest tax rates get an equal benefit from pre-tax savings?

And guess what, when they make withdrawals they pay higher taxes. Remember, 401k plans are tax deferral, not tax avoidance.

There is no so-called disparity. Rather it’s a logical reflection of tax rates.

And while the impression is created that the “disparity” involves really wealthy people. The fact is, by law no pay is counted for contributions above $290,000, a hefty amount, but not millions.

Let’s think about a tax credit. Usually a tax credit hits the taxpayers pocket when taxes are filed. If that’s the type of credit contemplated, the goal of encouraging lower income workers to save more is defeated because their regular take home pay will decrease without immediate pre-tax savings.

While we are talking about disparities, are the ultimate tax rates going to eliminate disparity too, he said in jest 😩 In a 401k nobody is saving taxes they are deferring them and in the process are changing what could be capital gains taxes into ordinary income taxes. Don’t you think high earners have figured that out?

But here’s the thing, better to go with a Roth account anyway and then you really do get tax free income in the future.

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 Washington, D.C. area.

At current 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 $1,950 benefit.”

Biden’s plan would shake up this situation, giving everyone a percentage tax credit based on how much they contribute. While the plans and exact amounts are not fully detailed, initial estimates put the tax credit at about 26 percent of a worker’s contribution. This approach helps equalize the disparity created by the current deduction approach.

For example, in this new plan a low earner may contribute $5,000 and receive a tax credit of $1,300, reducing taxes dollar for dollar. A high earner who puts away $10,000 would receive $2,600 – the same exact percentage as the low earner. At a 26 percent credit, the largest amount a worker under age 50 could receive is $5,070, assuming a maximum contribution.

Source: Biden’s Plan To Overhaul 401(k) Tax Breaks — Here’s Why It Could Create A Surge Into Roth 401(k)s | Bankrate

7 comments

  1. I disagree RD, If you get rid of deficit spending with a balanced budget amendment, you could do it at about 25 percent tax rate. Of course many tax saving deductions would have to go.

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  2. You mentioned the 401(a)(17) limit on covered compensation, however, the limit that typically curtails access to tax preferences by executives saving in their 401(k) is the 402(g) limit, $19,500 in 2020, and many times that limit is further reduced by compliance with non-discrimination rules. So, we already disproportionately limit access to tax-preferred, tax-deferred retirement savings.

    Class warfare. Bottom line, if we discourage individuals regarding saving by removing or reducing the tax preferences, without changing the taxation for distributions, people will notice and they will curtail their savings.

    Get ready for a Retirement version of PPACA (Health Reform) – a mandate for you, a mandate for thee, but not for me (Congress, President).

    Don’t forget, 40 years ago, Social Security benefits weren’t taxed, 401(k) contributions were pre-tax for FICA and FICA-Med, the FICA and FICA-Max caps were the same, there was no additional, income based monthly adjustment amount for Part B and Part D (Part D didn’t show up until 2006), we didn’t have the PPACA 3.9% surcharge, etc.

    Don’t tax you, don’t tax me, tax that guy behind the tree!

    The best tax is the one I owe and YOU pay!

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  3. Hola! So, if I’m understanding correctly, Biden’s plan will do away with the current process where your taxable income gets reduced dollar-for-dollar of the amount you contribute, and instead provide a tax-credit equal to 26% of your contribution? If that is true, then individuals who are at the lower than 26% tax brackets are actually receiving a greater benefit than they were in the current system, not?

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  4. A flat consumption tax instead of federal and state income taxes is the “fair” answer…buy more pay more…buy less pay less…this would simplify our tax codes and eliminate most tax returns…in my opinion.

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    1. A flat tax will never happen. Avoiding taxes by using the thousand of pages of tax code is big business, helping big businesses pay as little tax as possible. A better fix would exempt the first $50,000 for each family, then tax each dollar the same percentage to get the revenue needed to fund government.

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