During his run for President, President Elect Joe Biden released a 110 page document to shade more light of his economic plan and the implications it has on retirement. So, what does the next 4 years look like for the impact it has on several factors such as the tax code, savings for retirement as well as social security.
TAX POLICY
Joe Biden’s tax policy plan with regards to retirement involves increment of taxes on the wealthy in a bid to raise revenue. These taxes could be raised from 37%-39.6%. Capital gainers especially those in the stock markets and real estate could also have their tax rates increased. Capital gainers that make about one million dollars in profit, could have their tax rates increased from the current 20 percent to about 39.6 percent which is almost double.
Doing this could help a lot with your retirement savings. This is so because withdrawals for IRA and 401(K) are not subjected to taxes for capital gains. Instead, they are only subjected to regular income taxations.
If you are making an income of a million dollars and have retirement investments that are non-qualified, then you may need to make changes.One way to achieve this is by delaying any withdrawals until when you stop working.
SOCIAL SECURITY
The American social security was in question during the campaign, with experts stating that it might not go beyond 2035. Because of this, President Elect Joe Biden’s policy has put in place measures that will at least work to ensure that it lasts longer and get back on track. Biden plans on doing this using the approaches discussed below:
Expansion of Social Security Benefits
• This plan involves new benefits which is minimum for people who have worked for 30 years. These will be subjected to a poverty level of about 125%.
• The second way the social security benefits will be expanded is using monthly increased benefits for some retirees.
• A 20% increment is also expected for widows and widowers.
• Older retirees are also set to benefit by receiving an increment to cover for their health costs and savings that have gotten depleted. This however applies only to retirees who have at least 20 years of receiving the benefits for social security.
Terminating any kind of social cuts
• The Biden plan will work on doing away with any cuts in social security. This includes cases where the retirement age was raised and only Americans of low income were getting benefits from the program.
• Biden also plans on making it unlawful to repay the loans for federal students using the income from social security.
iii) The “donut-hole” Approach
• Here, Biden plans on subjecting the highest earners to increased taxes.
• For now, only $137,700 of the annual earnings for employees are subjected to taxes for security payroll.
• In Biden’s new plan, earnings that will be exempt from taxes related to social security will be between $137,000 and $400,000. What this means therefore is that any earnings beyond $400,000 will be taxed.
RETIREMENT SAVINGS
Despite the fact that Biden has put every measure in place to ensure that the social security is expanded and more stable, his plan also reiterates on the importance of making savings either in the IRA OR 401(K).He plans to encourage savings through the following measures…
Creating incentives for Employees and their Employers
• About 40% of the US Economy is accounted for by businesses that are small. These businesses are often quite reluctant about giving their employees benefits for retirement, citing costs and other administrative issues.
• Through the SECURE Act plan therefore, the Biden plans on giving small businesses more tax breaks. This is in a bid to help them organize for a retirement plan for their employees so that they can invest more on their future.
• The Biden plan also called for automatic 401(K) to encourage making savings especially for the employees who are not attached to any sponsored employer plans.
Contributions of Caregivers
• Deferrals of up to a particular amount in one’s account for retirement are often allowed by the current law.
• For instance, the limit for contribution for 401 (K) for this year, 2020 is $19,500.
• Sometimes however, unavoidable circumstances may subject an individual to go for temporary leave.
• During that window period, they may thus be unable to make contributions to the required amounts.
• The Biden plan takes care of such individuals by offering them a chance to bridge the gap when they get back to the workforce. This is achieved by ensuring that their limits for annual contributions are raised, hence enabling them to catch-up comfortably.
401(K) Tax Benefit Equalization
• The Biden plan allows for anyone with deferrals for tax 401(K) to use contributions from pre-tax to rapidly grow their accounts. When it comes to such an individual’s time to retire, they shall use these taxes which will depend mostly on their annual earnings at the given time.
• Biden’s team also worked to ensure that the tax benefits for those with 401(K) accounts are equalized.
• The plan also proposes using a flat tax credit. This will be a major relief especially because the contributions for retirements are tax-deductible. When you file your returns therefore, they will not be considered as income that is taxable.
• The Biden plan will work to ensure that your taxable income is not inclusive of any other tax credits. What this means is that irrespective of the fact that your full salary will be taxed, your tax bill will be exclusively dependent on the contribution you have in your 401(K) account.
Does your plan meet all your retirement needs? Schedule an appointment now with one of our advisors for a complimentary review of your retirement plan.