Biden plan for 401k’s... can anyone explain?

[TheHaitian]

What is he suggesting? Because I don’t think I like it.

Aka explain it to me like I am 5....

www.forbes.com/sites/ebauer/2020/08/25/joe-biden-promises-to-take-away-401k-style-retirement-savings-whats-that-mean/#25a8ff5a4eb0

[thyme4change]

Looks like it will be better for the average earner.

[schildi]

I am assuming he won't reverse my last 25 years of 401(k) contributions, right?

Oh no, I think we are doomed. Who would anybody vote for? All I can see is two bad choices. Ouch.

[TheHaitian]

Sept 1, 2020 22:18:42 GMT -5 thyme4change said:

Looks like it will be better for the average earner.

Ok and the not so average earner?

Educate me...

[tallguy]

People in the top tax brackets come out a bit worse overall.  People in the 22% and 24% brackets probably see little difference but aren't hurt by it while likely being helped a little.  People in low tax brackets are helped by getting a credit larger than the current tax savings on their contributions.  The plan is an attempt to equalize the benefit of saving a dollar no matter what your income.  That doesn't happen now. 

[adela76]

The headline ("Joe Biden Promises To End Traditional 401(k)-Style Retirement Savings Tax Benefits") is pure clickbait.  I'm disappointed in Forbes for publishing something like that, intentionally trying to panic people that their 401(k) is going to be taken away.

What Biden's actual website lists is 3 items under "Equalize Savings Incentives for Middle-Class Workers":
1) Equalizing the tax benefits of defined contribution plans . . . so that low- and middle-income workers will also get a tax break when they put money away for retirement.
2) Removing penalties for caregivers who want to save for retirement . . . allow caregivers to make “catch-up” contributions to retirement accounts, even if they’re not earning income in the formal labor market.
3) Giving small businesses a tax break for starting a retirement plan and giving workers the chance to save at work . . . almost all workers without a pension or 401(k)-type plan will have access to an “automatic 401(k).”

I think items 2 and 3 would have broad popular support, so it's really just the vagueness of item 1 that the article's author is exploiting to generate angst.  At the very end, she quotes a Biden advisor who says "If I'm in the zero percent tax bracket, and I’m paying payroll taxes, not income taxes, I don't get any real benefit from putting a dollar in the 401(k)."  I'd never actually thought of it that way, but it's a valid point.  As a high earner, contributing to my 401(k) gives me a significant tax break, but a lower-income person doesn't get that same benefit.  Expanding the Saver's Credit would be a tactic for "equalizing the benefit" across income levels, so that people who only pay payroll taxes still get a tax benefit.  I would think that's probably what Biden's team has in mind for item #1.

The author assumes that if you expand benefits at one end (lower income earners), you have to cut benefits at another end (higher income earners), who in theory could see their 401(k) tax-deferred limit reduced or eliminated in favor of a (smaller) credit.  She uses proposals from a 2014 think tank report (not Biden's campaign) as examples of how that could be done in theory. In practice . . . since when does our government bother paying for stuff when they pass it?  I would see a reduction of the 401(k) limit as extremely unlikely, nor is it something that Biden has ever mentioned specifically; it would be toxic politically and Biden is not a total idiot.  Not to mention Congress, while they are mostly idiots, would be unlikely to pass anything like that, whether the Democrats or Republicans are in control.

Don't worry, Biden is not going to take away your 401(k).

[justme]

Yea I was trying to figure out what would happen to me. Single with an AGI that's been in the low 60k. Just got a promotion that'll put me in the upper 60k. But I'm looking at either a promotion or a new job that will likely bump me up a bit (currently only have 5k more to put away in my 401k so not much left to lower my AGI) and I can't quite tell. Seems like I'm right on the cusp where it'd make more sense to put additional money in a taxable to deal with the capital gains tax over income but I'm not sure.

[tallguy]

Sept 1, 2020 23:52:06 GMT -5 adela76 said:

The headline ("Joe Biden Promises To End Traditional 401(k)-Style Retirement Savings Tax Benefits") is pure clickbait.  I'm disappointed in Forbes for publishing something like that, intentionally trying to panic people that their 401(k) is going to be taken away.

What Biden's actual website lists is 3 items under "Equalize Savings Incentives for Middle-Class Workers":
1) Equalizing the tax benefits of defined contribution plans . . . so that low- and middle-income workers will also get a tax break when they put money away for retirement.
2) Removing penalties for caregivers who want to save for retirement . . . allow caregivers to make “catch-up” contributions to retirement accounts, even if they’re not earning income in the formal labor market.
3) Giving small businesses a tax break for starting a retirement plan and giving workers the chance to save at work . . . almost all workers without a pension or 401(k)-type plan will have access to an “automatic 401(k).”

I think items 2 and 3 would have broad popular support, so it's really just the vagueness of item 1 that the article's author is exploiting to generate angst.  At the very end, she quotes a Biden advisor who says "If I'm in the zero percent tax bracket, and I’m paying payroll taxes, not income taxes, I don't get any real benefit from putting a dollar in the 401(k)."  I'd never actually thought of it that way, but it's a valid point.  As a high earner, contributing to my 401(k) gives me a significant tax break, but a lower-income person doesn't get that same benefit.  Expanding the Saver's Credit would be a tactic for "equalizing the benefit" across income levels, so that people who only pay payroll taxes still get a tax benefit.  I would think that's probably what Biden's team has in mind for item #1.

The author assumes that if you expand benefits at one end (lower income earners), you have to cut benefits at another end (higher income earners), who in theory could see their 401(k) tax-deferred limit reduced or eliminated in favor of a (smaller) credit.  She uses proposals from a 2014 think tank report (not Biden's campaign) as examples of how that could be done in theory. In practice . . . since when does our government bother paying for stuff when they pass it?  I would see a reduction of the 401(k) limit as extremely unlikely, nor is it something that Biden has ever mentioned specifically; it would be toxic politically and Biden is not a total idiot.  Not to mention Congress, while they are mostly idiots, would be unlikely to pass anything like that, whether the Democrats or Republicans are in control.

Don't worry, Biden is not going to take away your 401(k).

And that is exactly why those people should be putting their money into a Roth instead.  No tax benefit now, but no taxes later either.  They would likely be hurting themselves by funding a 401k.  No tax benefit now, but full taxes later.  Bad plan.

[resolution]

I can't make any sense of her math. It looks like for the 401K she is saying that the tax rate is just their normal tax rate because all withdrawals (including gains) are taxed at that rate. But for the new plan she is taking the total tax on all the gains and comparing it to the initial investment, using that to artificially raise the tax rate? Wouldn't taxable gains that are reinvested be added to the cost basis so they aren't taxed again?

When I checked the link that she provided to substantiate her example, it was senate testimony from 2011 and seemed to contradict her.

www.brookings.edu/testimonies/tax-reform-options-promoting-retirement-security/

Under the revenue-neutral change shown in Table 1, about 26 percent of tax filers would receive a reduction in tax liabilities, whereas 6 percent would see an increase. Tax increases would be concentrated in the top decile of the income distribution, while the bottom 90 percent of the distribution would receive, on net, a tax reduction.

[Deleted]

From the post-retirement side, I'm not sure 401(k)s were all that great, anyway. I did the good thing and maxed out every year, always contributing at least enough to get the employer match. I could have done the same with after-tax savings in most of the plans I had, but "everybody knew" that you should save in the 401(k) first. The conventional wisdom was that you'd save taxes now when you were working and thus in a higher income bracket and pay taxes at a lower rate when you withdrew in retirement.

EXCEPT:

1. Everything withdrawn from a 401(k) or IRA is taxed as ordinary income. That includes dividends and LT capital gains.

2. Withdrawals from a 401(k) or IRA are added to your Adjusted Gross Income unless they're donated directly to a charity (QCD). That's used as a basis for some deductions (Medical expenses as a % of AGI, for example) and for calculation of the IRMAA surcharge for Medicare premiums. Last year I was paying 260% of the regular Medicare B and Prescription Plan premiums, so the surcharges added up to $2,700 for the year. This year I'm paying only" 200% and I'm not even withdrawing from my IRAs yet. I'm not convinced that the tax effects of withdrawing when I have to start will be lower than when I was working when you include all the other "extras" it triggers.

3. No guarantees that tax rates will decrease- especially now with the cost of the CARES act.

If I were still working I might shift my savings to after-tax accounts if I weren't happy with any changes to the 401(k)s.

[teen persuasion]

Sept 2, 2020 1:48:40 GMT -5 tallguy said:

Sept 1, 2020 23:52:06 GMT -5 adela76 said:

The headline ("Joe Biden Promises To End Traditional 401(k)-Style Retirement Savings Tax Benefits") is pure clickbait.  I'm disappointed in Forbes for publishing something like that, intentionally trying to panic people that their 401(k) is going to be taken away.

What Biden's actual website lists is 3 items under "Equalize Savings Incentives for Middle-Class Workers":
1) Equalizing the tax benefits of defined contribution plans . . . so that low- and middle-income workers will also get a tax break when they put money away for retirement.
2) Removing penalties for caregivers who want to save for retirement . . . allow caregivers to make “catch-up” contributions to retirement accounts, even if they’re not earning income in the formal labor market.
3) Giving small businesses a tax break for starting a retirement plan and giving workers the chance to save at work . . . almost all workers without a pension or 401(k)-type plan will have access to an “automatic 401(k).”

I think items 2 and 3 would have broad popular support, so it's really just the vagueness of item 1 that the article's author is exploiting to generate angst.  At the very end, she quotes a Biden advisor who says "If I'm in the zero percent tax bracket, and I’m paying payroll taxes, not income taxes, I don't get any real benefit from putting a dollar in the 401(k)."  I'd never actually thought of it that way, but it's a valid point.  As a high earner, contributing to my 401(k) gives me a significant tax break, but a lower-income person doesn't get that same benefit.  Expanding the Saver's Credit would be a tactic for "equalizing the benefit" across income levels, so that people who only pay payroll taxes still get a tax benefit.  I would think that's probably what Biden's team has in mind for item #1.

The author assumes that if you expand benefits at one end (lower income earners), you have to cut benefits at another end (higher income earners), who in theory could see their 401(k) tax-deferred limit reduced or eliminated in favor of a (smaller) credit.  She uses proposals from a 2014 think tank report (not Biden's campaign) as examples of how that could be done in theory. In practice . . . since when does our government bother paying for stuff when they pass it?  I would see a reduction of the 401(k) limit as extremely unlikely, nor is it something that Biden has ever mentioned specifically; it would be toxic politically and Biden is not a total idiot.  Not to mention Congress, while they are mostly idiots, would be unlikely to pass anything like that, whether the Democrats or Republicans are in control.

Don't worry, Biden is not going to take away your 401(k).

And that is exactly why those people should be putting their money into a Roth instead.  No tax benefit now, but no taxes later either.  They would likely be hurting themselves by funding a 401k.  No tax benefit now, but full taxes later.  Bad plan.

What no one is apparently looking at is the margin rate for those low income earners (not bracket).  Refundable credit phaseouts make a huge difference.

If we contributed zero to tax deferred retirement accounts (or to Roth instead) we'd owe zero federal tax despite being in the 12% bracket nominally, because of nonrefundable and some refundable credits: CTC < 17, CTC > 17, AOTC.  However, if we contribute to traditional 401k type accounts, lowering our AGI and w2 wages also makes us eligible for EITC (fully refundable) and the Retirement Saver's credit (nonrefundable, but replaces partially refundable AOTC and CTC < 17, so we can get the refund).  It also lowers our state taxes, and makes us eligible for fully refundable state version of EITC (30% matching) and CTC < 17 (33% of first $1k).  Instead of owing zero federal tax plus nonzero state tax, we receive thousands in refunds, which we use to fund Roth IRAs - so increased retirement savings.

The phaseout rate for EITC is 21%.  Tack on the state 30% match, or another 6.3% for a 27.3% marginal rate in the zero bracket (actually, I'd add another 5 something % for state, because we never reach a zero state rate, so 42+% marginal rate).

Then there's non-tax advantages to lowering AGI like FAFSA: contributions to traditional 401k accounts can get our AGI low enough to qualify for either Simplified Needs Test (no asset reporting) or auto EFC = 0.

Reducing contribution limits to $20k OR 20% really could hurt us, because 20% of a low income is peanuts.  For reference, I'm currently contributing 80% of my income to my newly created SIMPLE IRA to hit the max ($16.5k including the 50+ catchup amount) to make up for the total absence of a retirement account up to now.  DH has shifted his contribution down to 30% to compensate.  We've been lucky to date in that his employers have always had no percentage limit, only the statutory $ limits, to retirement accounts, because maxing accounts means > 55% of income.

As for taxes later - with our plan of push everything we can to employer tax deferred accounts to reduce AGI/w2 wages, push refunds to Roth IRAs (because tIRA won't increase EITC, no changes to w2 wages, EITC tests on both), we are roughly 1/3 Roth 2/3 traditional.  We should be able to create a Roth conversion ladder to access tIRA balances before 59.5 penalty free and zero/low tax if we keep it within standard deduction or just above.  So we gradually move tIRA to Roth, live off Roth withdrawals, pay little tax, put off claiming SS to 70 for max benefits, and by 72 RMDs are minimal, so tax remains minimal.  Zero paid going in (some free refund money in Roth), near zero coming out.

So the things I don't like about the ideas mentioned in the article (no idea if actual Biden plans): limit contributions to 20% or $20k, replace tax benefit with a credit (only useful if fully refundable, and may not be useful if it removes the reductions to AGI/w2 wages), vague talk of simplifying the pantheon of various retirement accounts into one type (employer accounts help EITC; IRAs cannot). I do agree that the RSC needs to be reworked - as it stands, it's almost pointless, mostly because it's nonrefundable, but only low AGI can qualify so low tax liability. No one can get full credit - if your AGI is in the 50% range, the credit is larger than tax owed. If you defer less so that you owe more tax, you drop into the 20% credit range and your tax exceeds the credit.

[jerseygirl]

Agree we also socked away money in 401k, SEP IRA and got deduction. But now all of that is taxable and taxes will go up surely. The amount we put in originally is only a fraction of what we have now. So most of money withdrawn for the required minimum distribution didn’t get the original tax benefit.
As for the tax free period we held it, if we held in a regular brokerage most we wouldn’t have sold or would be taxed for the lower capital gains rate or just paid taxes on interest or dividends - not that much

Moving some of IRA into a Roth now wish we had originally done Roths when eligible or ‘backdoor’ Roth

I don’t like the Biden plan , think it might be first step of taxing (nontaxable) 401k and IRAs . There have been ideas floated about taxing based on amount of money held - even unrealized gains. You know - fair share and all that
If you have a low tax rate - use Roth , low or no tax benefit now and not taxed on withdrawal

[haapai]

The way that the Forbes article describes the current Saver's credit makes me want to scream!  It's so misrepresented that I just don't trust anything else that the writer has to say. 

[teen persuasion]

Sept 2, 2020 9:52:20 GMT -5 haapai said:

The way that the Forbes article describes the current Saver's credit makes me want to scream!  It's so misrepresented that I just don't trust anything else that the writer has to say. 

The thing is, everything they wrote is correct.  It's just a hard credit to distill down briefly. 


Lots of people misunderstand the 50% part is only on the first $2k contributed and get excited that they get 50% of everything contributed.  Or they don't realize the AGI limitations mean they are eligible for 10% at most.  Or that it's not refundable, so a $2k credit for MFJ is worth less, because under $39k AGI their taxable income is under $15k, so tax owed is not even $2k (and they might have other nonrefundable credits if they have kids, like $600 CTC<17).  But if they have $1 over the 50% limit, they drop to 20%; on MFJ $4k contributions that's only $800 credit, no longer covering the tax owed.

The credit is useless for us, because we don't owe enough tax after contributions to retirement accounts, and have lots of other nonrefundable credits that get applied first.  On the other hand, DS2 who is single and has no other credits available, can't get his income into range for the credit thru retirement contributions. His income falls between each of ours, so I wouldn't call him high income.

[bookkeeper]

We have our retirement savings in a 401k and Traditional IRA.  The traditional IRA was funded with DH's lump sum distribution.  The 401k we contributed to since 1983 and always obtained the employers match.  We too played with the numbers on how to save and still get the best outcome at tax time.  The last two years we worked, we started hoarding cash instead of maxing the 401k.  

We should have opened a taxable account and had that for ourselves too, but hindsight 20/20 and all that.

Our 401k money has been in play over 30 years now.  The account has had plenty of time to grow and produce the income to pay for withdrawals and the tax due.  I can see how things would be very different if we had only had the 401k accounts for a few years before retirement.  

We pay way less tax now than we did while working.  Payroll taxes alone ate up a large chunk of our working income.  State income taxes too. We moved to an income tax free state and don't owe payroll taxes anymore, so 22% or 24% in federal taxes seems like a bargain!