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- Feb 16, 2016
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Joe Biden Promises To End Traditional 401(k)-Style Retirement Savings Tax Benefits. Whatâs That Mean?
Will employers still sponsor retirement plans if tax deferral is removed? Plus: why retirement credit supporters are comparing apples and oranges.
www.forbes.com
Round about a month ago, I took a closer look at Joe Biden’s retirement-related policy proposals, or, more specifically, those of the “Unity Task Force,” which had just released its final document.
One of the items in that document and on the Biden campaign website is a promise to “equalize the network of retirement saving tax breaks” — a proposal that generally translates to eliminating the tax advantages currently enjoyed by retirement savings accounts and replacing them with a “credit” or “match.” The idea is that the tax advantages, or “tax expenditures,” as they’re called, disproportionately accrue to relatively higher earners, and the hope of a change is to provide benefits in equal measure to all income groups.
But how this translates in practice is not clear. An article at Roll Call this morning picked up on the proposal, as did Courthouse News, but neither had more detail, referencing only a 2014 Urban Institute/Tax Policy Center proposal, which provided various hypothetical alternatives.
So what did that proposal suggest? It included a variety of options, including
- Reducing total available pre-tax savings (employer and employee) from (at the time) $51,000 to only the lesser of $20,000 or 20% of pay;
- Expanding the currently relatively-small “Saver’s Credit” (equal to 50% of the first $2,000 in retirement savings, only for relatively lower earners, up to $$19,500 for singles, $39,000 for couples; and phasing out quickly, to 20%, 10%, and ultimately nothing for singles with $32,500/couples with $65,000 in income) to stay at 50% for higher earners and phase out in a much more gradual manner instead; or
- Wholly removing any tax benefit for retirement savings and provide a credit of 25% instead (often this proposal includes a limit to the credit; this particular proposal doesn’t specify such; also, note that this was prior to the 2017 tax law which dropped tax rates).
Let’s start with a small point of clarification: strictly speaking, “401(k)” refers to the ability of a worker to defer a part of their pay for retirement savings purposes, and to avoid taxes until the money is ultimately withdrawn. The deferral of employer contributions is not a part of section 401(k) of the relevant IRS tax code. Does Biden want to remove the tax preference for both workers’ and employers’ contributions to retirement plans, or only the former?
The Urban Institute proposal assumed that higher-income workers would continue to save just as usual, even if they are on the losing end of tax changes. But would they continue to save through their employers’ 401(k)? And, likewise, if employers’ contributions no longer offered a tax advantage, would they continue to offer these plans, or to offer employer contributions to them?
Hard to follow? Here’s a table to illustrate:
Simplified illustration of tax impacts on retirement accounts -- OWN WORK
Comment:
China Joe Biden wants to dramatically reduce how much you can save for retirement in a 401(k). His next step if elected would be to end Social Security... "Biden wants to dramatically reduce how much you can save for retirement in a 401(k).
I think that's the best case. The worst case is confiscation."
China Joe is looking to tax your 401(k) and 403 (b) retirement plans on both ends, before yo save it and when to start taking it as a pension.
Democrat public employee unions invested their pensions with crooked connected pseudo-mafia parasites for years, resulting in dramatically underfunded pensions.
The time will come when firefighters and teachers need YOUR "subsidized" 401(k) for the sake of basic fairness.
They won't call it confiscation. It will just be a "millionaires tax" on withdrawals from an 401(k) that has more than say $250,000 in it. it will start small (maybe 3 or 4%) and then grow little by little to match the falloff in benefits for public union employees.