What is the Biden/Harris plan for 401k?

The Biden/Harris proposal for tax changes would have a big impact on how we save for retirement. What are the changes and how would they effect savers?

We get a preview of the plan in the "Biden Plan for Older Americans" published at here. The changes to retirement plans are summarized in section 4 "Equalizing Savings Incentives for Middle-Class Workers." This section begins with the claim that "about two-thirds of the benefit goes to the wealthiest 20% of families." And now that we know that the problem is unequal distribution of tax benefits for retirement savers we learn that the solution will be to "make these savings more equal so that middle class families can enter retirement with enough savings to support a healthy and secure retirement."
So how does Joe Biden plan to enable middle class workers to prepare for retirement and make tax benefits more equal across income levels? There are three elements to the solution:
1. Replace tax breaks with tax credits. This would reduce benefits for high tax earners and increase tax benefits to lower earners.
2. Allow caregivers to contribute to retirement plans even though they don't receive wages. An example of this would be a full time parent that does not receive wages.
3.Provide tax incentives to small businesses that offer retirement plans.
Our focus will be on the impact of the first element of the proposal: replacing tax deductible contributions with tax credits.

How do 401k plans work today?

The 401k plan is a defined benefit retirement savings program intended to help employees save a portion of their earnings. Money contributed to a 401k plan is not taxed until it is withdrawn in retirement. Many employers will help bolster your savings by contributing to your savings account. Typically they will do this a percentage match.

Here's an example:
Bob earns $50,000 each year. He contributes 10% of his earnings to his employer sponsored retirement plan. As a result Bob will only be taxed in the present year for $45,000 of his earnings. Additionally, Bob's employer will contribute a 3% match to Bob's account ($50k x 3% = $1,500). At the end of the year Bob is in great shape because he only paid taxes on $45k of earnings and managed to save $6,500!

Bob, who is 55, does this for 10 consecutive years and thanks consistent 7% annual growth of his investments he has accumulated a bit more than $93,500.

Now that Bob is 65 he can start withdrawing his savings. When he does this he will do it at the new tax rate based on his new income. Because his income is now lower in retirement he may pay less in taxes.

Why change the way 401k plans work?

The primary concern about 401k plans is that the tax benefits largely go to the top income earners. This fact, combined with difficulty in earning enough to save, has resulted in middle class earners accumulating relatively little savings.

The proposed plan would equalize the tax savings across earnings groups. This is illustrated in an example below that shows how much tax our

In the table above we see households (HH) with a variety of income levels ranging from $50,000 to $500,000. Each family pays income taxes based on their "Taxable" income which is what is left after the combined value of the standard deduction ($24,400) and a 401k contribution equal to 10% of their gross earnings.
There are two important things to notice:
1. The "Extra Savings" generated by each household after saving 10% of their income, and
2. The "Savings per $1k Contributed to 401k" which demonstrates the tax benefit for each household of different income levels.
For example: The family that earns $50k and saves $5k per year reduces their taxes by $16.80 per $1000 saved. In contrast the family that earns 10 times as much saves an additional $350 per $1000. The tax benefit is 20x better for the high earner.

Learn more.

In order to determine if the proposed changes are "good" or "bad" you should consider learning about (a) the details of the proposed policy and (b) the data about how Americans are using and benefiting from the current 401k tax strategy.

Below you will find links to several sources:

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