Episode #25 - 401(k) changes with change in President
With a winner announced over the weekend we've got some changes to look out for
Intro:
Starting some point in October, the gnomes who curate my Google Chrome “newsfeed” (something like four click-baity articles they show me each time I make a new tab) kept on showing me an article with the salacious title: “How Joe Biden will take away your 401(k).” Salacious as it was, I managed to resist the temptation to click because I didn’t have the patience to figure out what it all meant. With the election of the Biden-Harris ticket, I figured now is the time to figure it out and share it with my loyal followers.
I hope it helps you understand some of the upcoming changes that anew administration will attempt to bring to the American people as they wield their newfound power.
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Background:
If you’ve been around the #Winnings block for a while, you might remember we covered what a 401(k) is here in episode #12. I’m not going to review all of those items in this note other than the basic concept that a 401(k) enables employers to provide a retirement account for their employees. Employees must opt to contribute money to that account from their paycheck before it hits their bank account. The money goes directly into a couple of options of investments and the employee’s compensation goes to a different place than their bank account.
No matter who you voted for in this election, I encourage you to check out what the JoeBiden.com website labels for “older Americans.” It covers a fair number of items, but for our purposes there is a whole section dedicated to 401(k)s.
Here I quote the opening of the 401(k) section:
In the modern retirement landscape, a sound retirement begins with years of diligent saving. While other aspects of the Biden Plan will help raise wages for workers and reduce costs for spending like child care and health insurance, the Biden Plan will also ensure that middle-class families get a leg up as they grow their nest egg.
Under current law, the tax code affords workers over $200 billion each year for various retirement benefits – including saving in 401(k)-type plans or IRAs. While these benefits help workers reach their retirement goals, many are poorly designed to help low- and middle-income savers – about two-thirds of the benefit goes to the wealthiest 20% of families. The Biden Plan will make these savings more equal so that middle class families can enter retirement with enough savings to support a healthy and secure retirement.
What to make of this?
The critique of the status quo is between the lines and can be understood as follows: Folks in the highest tax bracket i.e. those who get taxed 37% on their income, get the most benefit from putting the max into their 401(k). A simple recap thanks to the folks on The Street:
Assuming max-contribution of $19,500:
Folks in the 37% bracket receive a tax benefit of $7,215
Folks in the 22% bracket get $4,290
Folks in the 12% bracket get $2,340
In laymen’s terms, Biden’s plan is to incentivize contributions of the max number of dollars independent of your income level - you get a flat 26% credit. For reference, 37% tax bracket you need to be making above $510,300 - for more fun with tax brackets, click here.
The outcomes here are not obvious, as with many financial adjustments from on-high unforeseen results often emerge. For example, more high income individuals will likely utilize the Roth 401(k) because then you pay your typical income tax and don’t waste your time with the lower rebate and you get the benefit of not being taxed for your gains when you finally withdraw (that’s how the Roth’s work).
If you want to see a reasoned argument against this Biden-Harris plan, click here.
Takeaway:
New president, means new policy MIGHT be coming your way. This means that you need to spend the time to understand the policies and figure out how they will impact your life. It’s not always obvious that these policies will pass the needed parts of the legislative branch to come into law, but you should know what’s up and when something changes you should figure out if you need to make changes.
Interact:
Regardless of where this policy lands, the only way to help yourself save for retirement is to save for retirement. A few folks have reached out to me about thinking through where/how to deposit their money for retirement. As I’ve referred you to in the past, automatic systems for savings are super helpful and I encourage you to check them out!