Does the president really have an impact on 401(k) tax benefits?
Do you dream of one day having a large retirement nest egg? To get there, you need to save up for years by investing in a retirement account. Saving in a retirement account allows your savings to generate interest and grow alongside the markets in which they are invested. Your savings in a 401(k) account are tax-deferred, which means you do not pay taxes on them until you start withdrawing. However, with the election approaching, people are wondering what type of effect the next president will have on 401(k) tax benefits.
Let us be clear. We are not here to tell you how to vote. There is more that goes into deciding on who you want to be the next president than your 401(k) tax benefits. However, your money is important, and we want you to have a better understanding of how each of the two main presidential candidates can impact your 401(k) tax benefits.
The incumbent president has not yet released a formal policy outlining his plans for American retirement savings. Some speculate that a Trump reelection may not change your current 401(k) tax benefits. Some point to the incentives for businesses to start 401(k) plans thanks to the SECURE Act of 2019 and conclude that the current circumstances are fine and Trump does not need to make any changes.
President Trump does urge caution to voters that a different president will cause 401(k) accounts to drop to nothing. The effect a new president may have on your overall 401(k) savings is not conclusive among financial experts, but one thing is clear: President Trump wants voters to trust that their retirement plans are safe under his administration. We will keep an eye out for any formal policy updates and share them with you when possible.
The challenger for the White House has plans to stabilize and expand on Social Security with higher taxes on the wealthy, but he does not want Americans to neglect their 401(k) or IRA investments to have a more comfortable retirement.
Under Biden’s proposed policy, 401(k) tax benefits would be equalized among account holders. Instead of receiving a tax deferral based off your tax bracket being lowered by contributing pretax dollars, contributors would receive a flat tax credit. Tax credits reduce your tax liability, but not your actual taxable income.
This might sound like there is no difference other than semantics, but actually this is a big change, especially for those who are wealthier. Under the current system, someone in the top tax bracket who contributes $1,000 receives a $370 deduction (unless their income afterward drops them into a lower tax bracket), and someone in a lower tax bracket would only receive a $220 tax deduction for the same contribution. In other words, the wealthier you are, the larger incentive you have to contribute to retirement accounts.
Under Biden’s plan, both individuals receive the same tax credit for their contribution rather than being treated differently based on their bracket. This may increase incentive for lower- and middle-class voters who want equal benefits, but it could decentivize wealthy voters who may not contribute as much if they do not have as many benefits as they enjoy now.
Talk to a ProVise CFP® professional about your retirement planning
Regardless of who wins the election this year, it is important for you to have a retirement plan you can count on. At ProVise Management Group, our CERTIFIED FINANCIAL PLANNER™ professionals can work with you through any financial landscape to help you develop and manage a retirement plan that works for you.
Our team can get to know you and your current financial circumstances, goals, risk tolerance and personal values when creating your personalized financial strategy. We can also create a written plan for you at a fiduciary standard of care. All our written plans come with an unconditional money-back guarantee. If you are unhappy with your written plan, you can return it to us, and we will refund 100% of the fee paid.
Are you ready to talk to a professional about saving for retirement? Contact ProVise today to schedule a complimentary consultation.