Joe Biden is coming for your 401(k) and it’s actually worse than David portrayed it in previous episodes of the podcast.
Under Joe Biden’s tax proposal he is going to equalize the tax benefits of retirement plans. David breaks down exactly what this means for people in different tax brackets and what the implications of this plan are.
In order for Joe Biden’s plan to be tax neutral the rate at which you receive a tax credit is 26%. This essentially means that anyone in a tax bracket under 26% is getting a great deal and anyone in a bracket above the 26% tax bracket is getting a terrible deal.
Let’s say you’re in a 39.6% tax bracket and wanted to contribute $20,000 to your traditional 401(k). With the 26% benchmark you would receive a $5200 tax credit and have to pay $2720 in income tax on that contribution.
But wait, there’s more. At some point you are going to have to take those dollars out because they haven’t taxed yet. Not only did you pay 13.6% to put the money in, if you’re still in the 39.6% tax bracket when you take the money out you end up paying 53.2% and that still doesn’t count the state tax implications.
The math taking place on the tax return happens on a separate line which means the contribution carries down to the state level. Unless state legislatures act, your retirement plan contribution may be fully taxable at the state level when contributed.
Since the retirement account is still pre-tax, which means the balance of your retirement account might be fully taxed at the state level upon distribution.
The solution is fairly simple. If you find yourself above the 26% tax bracket, the solution is to simply stop contributing to your 401(k) and only contribute to your tax-free bucket. Pay your tax rate today if it’s above 26% and avoid all the extra taxation.
You are not going to be able to keep very much of your savings if you’re above the 26% threshold and you contribute money to your 401(k). This proposal has the ability to radically redefine the retirement landscape.
If Joe Biden wins the election, this proposal could become a reality.
Mentioned in this Episode:
The Biden Tax Plan: Proposed Changes And Year-End Planning Opportunities