Biden plans massive 401k overhaul

[Rusty Student]

For instance, a taxpayer in the top income bracket would receive a $37 benefit for every $100 contributed to a retirement account. By comparison, a taxpayer in the bottom bracket would get just a $10 benefit in exchange for the same $100 contribution.

But Biden has proposed eliminating such deductions and instead replacing them with flat tax credits for each dollar saved, as first reported by Roll Call. The campaign has not specified with the percentage would be, but the Tax Foundation estimated that a 26% credit would be roughly revenue-neutral, something the Biden campaign is aiming for.

https://finance.yahoo.com/news/biden-retirement-proposal-overhaul-traditional-173611440.html

Good or bad idea?

 

[Rusty Student]

@ski-tiger can we get your thoughts on this proposal? You're an accountant, right?

 

[TigerCruise]

So basically the more money you contribute the less it is worth

Makes total sense

 

[tkbmu]

So basically the more money you contribute the less it is worth

Makes total sense

Well today’s system is set up so that the more you make the more it’s worth. Changing it to be even tax benefit for each dollar saved doesn’t seem entirely bad.

 

[TigerCruise]

Well today’s system is set up so that the more you make the more it’s worth. Changing it to be even tax benefit for each dollar saved doesn’t seem entirely bad.

If you don't make any money

 

[Tiger Pete]

Interesting. Seems like it would benefit everyone except for the ~4% richest employees.

I'm married filling jointly and make between $171k-$326K. That put me in the 24% tax bracket. I max my 401K at $19K this year, so I save 24% of that in taxes ($4560).
If I understand it, his policy would change that to a 26% credit. So instead of my $4560 savings, I'd have a $4940 credit. Not bad, but it's not really moving the needle.

If you are in a higher tax bracket than that is going to hurt. Especially if you do profit-sharing to go above the max $19K limit.

 

[ski-tiger]

I don't get to bent out of shape about revenue neutral changes. The basics are the poor are getting an incentive to save and the rich are getting theirs haircut. Under the premise that a dollar saved should get equal treatment under tax law, it makes sense. But the existing rules are a give back to the progressive nature of a tax brackets.

1) Winners and losers: Single people with taxable income (that is not gross income people) >40k; Married with >$80k are losers, those with lower taxable incomes are winners:
2) Incentive 10% bracket: S-0-10 and M-0-20 have a cost of $82 to save $100
Incentive 12% bracket: S-10-40 and M-20-80 have a cost of $84 to save $100
3) The critique that those with taxable income >40S or >80M will flock to Roth accounts, is dumb. They are paying the tax now rather than later. That's actually good for the short term, from the view of the US teasury.

The funny thing is, for those making >40S or >80M this plan is not all that different in $$$ outcome than Trumps plan of reducing traditional 401k savings to $2,400 during tax reform. But the Trump plan didn't provide the incentive for the poor. But I'm sure no one will see this. But Biden and Trump basically agree on limiting 401k's for the upper class based on their proposals.

 

[Tiger Pete]

I don't see the benefit to lower income families here either. If you make less than $20K per year (10% tax bracket) you don't have any federal tax liabilities after the standard deduction and child tax credits...etc, so having an extra credit on their 401K contributions isn't going to help.

 

[ski-tiger]

Interesting. Seems like it would benefit everyone except for the ~4% richest employees.

I'm married filling jointly and make between $171k-$326K. That put me in the 24% tax bracket. I max my 401K at $19K this year, so I save 24% of that in taxes ($4560).
If I understand it, his policy would change that to a 26% credit. So instead of my $4560 savings, I'd have a $4940 credit. Not bad, but it's not really moving the needle.

If you are in a higher tax bracket than that it's going to hurt. Especially if you do profit-sharing to go above the max $19K limit.

Thanks for sharing numbers. But you'd be a loser in this plan. Lets say you make 100k in the 24% bracket.

100*.76 = $76k Then you save it all (for ease of example). Your $76k of savings * 26% is a credit of ~20. So you are still out $4k. $76k after tax + 20 credit. So you are bleeding 4% of whatever you save.

Good example. But most won't understand this nuance.

I don't see the benefit to lower income families here either. If you make less than $20K per year (10% tax bracket) you don't have any federal tax liabilities after the standard deduction and child tax credits...etc, so having an extra credit on their 401K contributions isn't going to help.

Its refundable. In the tax world 'refundable' means you get it even if you don't have any income tax liability. Very few credits are refundable. The Earned Income Credit is one of them.

 

[Rusty Student]

Seems like a stupid idea and pointless overhaul.

 

[MUTiger91]

I don't get to bent out of shape about revenue neutral changes. The basics are the poor are are getting an incentive to save and the rich are getting theirs haircut. Under the premise that a dollar saved should get equal treatment under tax law, it makes sense. But the existing rules are a give back to the progressive nature of a tax brackets.

1) Winners and losers: Single people with taxable income (that is not gross income people) >40k; Married with >$80k are losers, those with lower taxable incomes are winners:
2) Incentive 10% bracket: S-0-10 and M-0-20 have a cost of $82 to save $100
Incentive 12% bracket: S-10-40 and M-20-80 have a cost of $84 to save $100
3) The critique that those with taxable income >40S or >80M will flock to Roth accounts, is dumb. They are paying the tax now rather than later. That's actually good for the short term.

The funny thing is, for those making >40S or >80M this plan is not all that different in $$$ outcome than Trumps plan of reducing traditional 401k savings to $2,400 during tax reform. But the Trump plan didn't provide the incentive for the poor. But I'm sure no one will see this. But Biden and Trump basically agree on limiting 401k's for the upper class based on their proposals.

I'm having difficulty reconciling the numbers above with the Tiger Pete example. Why don't they seem to align?

 

[TigerCruise]

I don't see the benefit to lower income families here either. If you make less than $20K per year (10% tax bracket) you don't have any federal tax liabilities after the standard deduction and child tax credits...etc, so having an extra credit on their 401K contributions isn't going to help.

That's if they are even contributing.

Only ~30% of people even have a 401k, I'm going to guess it isn't too many people making under 20k a year.

 

[ski-tiger]

I'm having difficulty reconciling the numbers above with the Tiger Pete example. Why don't they seem to align?

Cause he is wrong. Lay people are not realizing that you pay tax first and then save. That's why is not really a 26% credit. Its lower effective rate by your marginal income tax.

For a person in the 24% bracket, the 26% credit is equivalent of .26 * .76 = ~20%. Thats why he bleeds 4% under the new law.

There, now I've done it two ways. No more questions. I need to get into the Hennessy.

 

[CTG-Tiger]

Dumb

 

[shoegazer]

We are all going to die!!!

 

[MUTiger91]

Seems like a stupid idea and pointless overhaul.

I surprisingly mostly agree with you. The ideas of attempting to get people to save more or to get more people to save are a noble pursuit. The implementation is lacking. Lower income people would have more benefit from saving, but then they probably can't afford to do it. People who are saving could potentially save less. If I were in the early stages of my career I would be pretty unhappy with this idea.

 

[Rusty Student]

I surprisingly mostly agree with you. The ideas of attempting to get people to save more or to get more people to save are a noble pursuit. The implementation is lacking. Lower income people would have more benefit from saving, but then they probably can't afford to do it. People who are saving could potentially save less. If I were in the early stages of my career I would be pretty unhappy with this idea.

The way to get people to invest early is by education, not this.

 

[MUTiger91]

The way to get people to invest early is by education, not this.

You are right about the education part too. I had someone tell me once that she didn't want to contribute to the 401K just because the company "wanted her to". I showed her with some VERY conservative (no increases in income, 6% annual return) assumptions that she was leaving $250K on the table over the course of 30 years without even factoring tax benefits just by missing out on contribution matching. It is situational, obviously, but it's amazing the difference when people have the right information.

 

[tkbmu]

Seems like a stupid idea and pointless overhaul.

Actually it’s a pretty good tweak of how the system is set up. I’d also be down to do something similar for the home interest/property tax deduction. Own a house get credit or deduction of x. No longer tie it to whether or not you carry debt. Doing this would almost eliminate all itemization (tax simplification), further incentivize low income home ownership (by higher deduction than they’d otherwise get), and also benefit those that have already paid off their home.

I surprisingly mostly agree with you. The ideas of attempting to get people to save more or to get more people to save are a noble pursuit. The implementation is lacking. Lower income people would have more benefit from saving, but then they probably can't afford to do it. People who are saving could potentially save less. If I were in the early stages of my career I would be pretty unhappy with this idea.

If you aren’t saving either way it doesn’t really matter does it? Only if you don’t save at all until you reach the upper end of the tax bracket then pile mounds of cash away. For that small percentage of the top 5% I’m ok if they pay a bit more for not saving along the way.

 

[MUTiger91]

If you aren’t saving either way it doesn’t really matter does it? Only if you don’t save at all until you reach the upper end of the tax bracket then pile mounds of cash away. For that small percentage of the top 5% I’m ok if they pay a bit more for not saving along the way.

The impact ski talked about in his post hits top 10% incomes that are not top 5%. The cumulative effect of that delta over many years adds up. It would have cost me quite a bit if GW Bush did this in 2000.

 

[brosept]

So Biden wants to reduce the tax deductible 401K amounts for successful people who are responsible investors and savers?

 

[MUTiger91]

So Biden wants to reduce the tax deductible 401K amounts for successful people who are responsible investors and savers?

It's the Mel Carnahan plan. Don't raise taxes, cap deductions. It is a sneakier tax if people don't pay attention.

 

[ski-tiger]

So Biden wants to reduce the tax deductible 401K amounts for successful people who are responsible investors and savers?

If you say so, but dont forget Trump tried to do the same.

 

[87Tiger14]

Bad optics screwing with people’s retirement funds.

 

[S_W_M_O]

I'm not old, but I regret putting as much as I have in a 401k. They don't make a lot of sense to me unless you plan on working till 60. If I could go back, knowing I will and have been wise with my savings and investments I would have put $0 into my 401k.

 

[Tiger Pete]

Thanks for sharing numbers. But you'd be a loser in this plan. Lets say you make 100k in the 24% bracket.
100*.76 = $76k Then you save it all (for ease of example). Your $76k of savings * 26% is a credit of ~20. So you are still out $4k. $76k after tax + 20 credit. So you are bleeding 4% of whatever you save.
.

The concept of how a credit is applied it odd to me. Let me see if I can redo my example.

Current way - I contribute $19K pre-tax so I save 19,000 * .24 = ~$4500
Proposed way I contribute $19K after tax. So I'm taxed that $4500, but then I get a 26% credit when I file. I think you're saying the 26% credit is applied to the net amount saved after subtracting out the taxes? So (19,000 - 4500)*0.26 = $3600 credit.

The article linked says that everyone will have an effective 20.5% tax deduction. 19K * .205 = $3900. That's close to my result above.

 

[brosept]

I think the real benefit to real people is establishing a savings habit when you first take a job. Saving 82 or 84 to get 100 is a


If you say so, but dont forget Trump tried to do the same.

Link to Trump targeting retirement funds.

 

[Tiger Pete]

I'm not old, but I regret putting as much as I have in a 401k. They don't make a lot of sense to me unless you plan on working till 60. If I could go back, knowing I will and have been wise with my savings and investments I would have put $0 into my 401k.

I understand having some bridge accounts so you can access money prior to age 60, but zero contributions seems extreme. That a lot of tax benefits you are giving up.

 

[Mizzoubballfan2]

I understand having some bridge accounts so you can access money prior to age 60, but zero contributions seems extreme. That a lot of tax benefits you are giving up.

And usually that would mean giving up an employer match which is free money.

 

[RockemTigers]

We should be encouraging wage earners to save instead of penalizing them as Dems will do

No surprise from the tax and spend crowd on the left

 

[MUTiger91]

I understand having some bridge accounts so you can access money prior to age 60, but zero contributions seems extreme. That a lot of tax benefits you are giving up.

Just some quick back of the napkin stuff.
$15K/year invested in 401K vs. 75% of that ($11,250) invested after tax every year for just 20 years.
At the end of it, take out the same 25% from your 401K and you can fool yourself into thinking the results are the same. But in the after tax investing scenario you have only paid the tax on the original invested amount, not on any of the earnings.

If you made a 6% return on your money you have 14% more in real money in your 401K at the end. ($449K vs. 393K)
If you made a 10% return on your money you have 21% more in real money in your 401K at the end. ($720K vs. 596K)
If you make the same 10% return and continue for 30 years instead of 20 you come out 29% ahead ($2.05M vs. $1.59M)

None of the above accounts for the fact that most people live on less when they are retired and therefore pay a lower tax rate on everything, so you can probably add a few pct to the return of the 401K vs. the after-tax investment.

This is all traditional 401K plan, not a Roth or the Joe plan. This doesn't include any employer match. It's just the tax benefit.

 

[blackgold74]

If you don't make any money

Sounds like it would benefit you. Might want to rethink this election.

 

[ski-tiger]

Bad optics screwing with people’s retirement funds.

Link to Trump targeting retirement funds.

To be clear, no one has ever 'targeted' retirement funds. All proposals past and present are for new contributions.

The Trump 2400 limit that was struck.

https://humaninterest.com/blog/401k...eform-bill-contribution-limit-decreases-2018/

 

[mufootball1]

Seems like a stupid idea and pointless overhaul.

Seems to hurt some while at the same time providing only minimal benefit to others.

Doesn’t seem worth all of the red tape.

 

[naw7a5]

To be clear, no one has ever 'targeted' retirement funds. All proposals past and present are for new contributions.

The Trump 2400 limit that was struck.

https://humaninterest.com/blog/401k...eform-bill-contribution-limit-decreases-2018/

No one is a pretty broad statement I think there have been several balloons floated concerning the various qualified plans and how the govt could get their hands on taxes earlier.

 

[dreamlaw]

So Biden wants to reduce the tax deductible 401K amounts for successful people who are responsible investors and savers?

They should be paying more tax now and going heavily Roth, at least 50/50. Tax deductions are a drug that keep people from real analysis.

 

[SpikesDown6]

To be clear, no one has ever 'targeted' retirement funds. All proposals past and present are for new contributions.

The Trump 2400 limit that was struck.

https://humaninterest.com/blog/401k...eform-bill-contribution-limit-decreases-2018/

No matter the accuracy of this, this is "whataboutism". As a result, I have to dismiss it.

Spoiler

j/k thank you for the information

 

[naw7a5]

They should be paying more tax now and going heavily Roth, at least 50/50. Tax deductions are a drug that keep people from real analysis.

Who is they?

They need to stop talking out their butts. In this case "they" refers to lawyers.

 

[Tiger Pete]

They should be paying more tax now and going heavily Roth, at least 50/50. Tax deductions are a drug that keep people from real analysis.

I switched to a ROTH 401K in 2018 after the tax changes. I figured I'd never see taxes this cheap again, so why not pay now and reap the benefit later? Paying those extra taxes was still painful even though I had thought it out. Then I started reading some articles about last dollar in vs first dollar out concept. I pulled the plug in 2019 and went back to traditional.

 

[naw7a5]

I switched to a ROTH 401K in 2018 after the tax changes. I figured I'd never see taxes this cheap again, so why not pay now and reap the benefit later? Paying those extra taxes was still painful even though I had thought it out. Then I started reading some articles about last dollar in vs first dollar out concept. I pulled the plug in 2019 and went back to traditional.

There are a ton of variables that go in to each person's decisions. That is why the blanket statements don't make sense. For your situation you may be absolutely correct. For others (especially those closer to retirement) it may be the opposite.