So the Biden plan is to revamp 401(k) tax incentives.
Today - you contribute to a 401(k), you get that amount deducted from your income.
Biden’s plan - you contribute to a 401(k), you get a flat credit (estimate appears to be 26% of contribution.
Impact:
Today:
If I earn $50k and contribute $10k, I get to pay $1200 less in taxes ($50k is in the 12% bracket for joint filers).
If I earn $500k and contribute $10k, I get to pay $3,500 less in taxes ($500k is in the 35% bracket for joint filers).
Tomorrow:
Both versions pay $2,600 less in taxes because of the flat credit (another version being considered has that $2600 being deposited directly in your 401(k), but we will leave that alone for now.
Thoughts from the crowd? I am all for providing incentive to people to invest for the future, but I don’t know if this will do much to change behavior at lower income levels, considering how many people pass up free employer matches (e.g., ~40% of people <$40k income get their full match)
It’s a small tax increase for high income earners (a .3% increase for that $500k earners who is contributing the max).
In the current rules, it says to to low income guy, “hey, save ten grand and I’ll give you 1200” and to the upper income guy, “hey, save ten grand and i’ll give 2400 MORE than the schmoe over there who thinks this is a good deal.”
Do you think that a flat credit versus a deduction from income should apply to all deductions (not all that relevant today for lower income folks with the bigger standard deduction, but in theory?)
Interesting to think about - and would the flat credit be the same for student loan interest, property tax, mortgage interest, medical expenses?
I’ve mentioned this before, but I think that a universal $5k gift to every newborn and a 50% reduction in the 401(k) benefit is a hugely cost effective way to secure better retirements - would secure a ~$320k nest egg (2020 dollars) for every American upon hitting 72 and is far cheaper for taxpayers (eventually) than today’s 401(k).
