Biden retirement proposal would upend traditional 401(k) plans

Fair you say? Before you read this, keep in mind that only compensation up to $285,000 can be used when making 401k contributions in 2020 so don’t think a person earning $600,000 can contribute a percentage of that.

I always find it amazing when an analysis concludes that a high income person who pays the highest taxes gets the greatest tax break when a portion of their income is taxed differently. Yup, and they are likely to save more too; another startling revelation.

These tax breaks are in truth tax deferral. That means taxes eventually are paid and here’s an amazing fact, when they are paid, higher income earners will still pay higher taxes.

Of course limiting the tax deferral percentage to less than the actual tax rate, means less taxes will be paid upon withdrawal.

Making the credit refundable is merely wealth transfer and does nothing to improve retirement income.

Besides, we should all be saving on an after-tax Roth basis in any case.

Under current law, workers contribute pretax dollars and thereby reduce their annual taxable income, but they pay full freight when funds are eventually withdrawn in retirement. The upfront tax break is larger for richer households, however, since deductions are more valuable the higher one’s tax bracket is.

For example, take a single filer in the top 37 percent bracket making $600,000; for each $1,000 she contributes to a 401(k) plan, her tax deduction is worth $370. A single filer earning $60,000, however, would be in the 22 percent bracket and only receive a $220 tax break for that same $1,000 contribution.

What’s more, upper-income earners tend to save more in 401(k) plans, which have an annual cap that rises with inflation; in 2020, the limit is $19,500, with an extra “catch-up” contribution of $6,500 allowed for those 50 or older. The more pretax dollars set aside, the larger the tax break is. Workers can also save $6,000 in 2020 in traditional individual retirement accounts, or $7,000 for those 50 or older.

Such contributions are fully deductible unless one or both spouses also have a workplace retirement plan, in which case the deduction phases out for higher earners.

Biden would instead “equalize” the incentive system by ending such deductions and replacing them with flat tax credits for each dollar saved. The campaign isn’t saying what that percentage would be, but the Urban-Brookings Tax Policy Center has estimated a 26 percent credit would be roughly revenue neutral over the first 20 years and beyond, which the Biden campaign is aiming for.

Under this plan, someone earning $600,000 would get the same tax break as someone making $60,000 — an identical $260 tax credit for their $1,000 retirement contribution. The credit would also be refundable, so someone earning too little for the credit to fully offset their income tax liability would still get the full tax credit.

Source: Biden retirement proposal would upend traditional 401(k) plans – Roll Call


  1. One day, the government will find a way to tax the Roth IRA a second time. Yet every politician claims people can’t afford to save and we need a new program for the unwilling retirement savers. Then they go and propose ways of taxing that retirement money which will only add confusion and discourage people more.

    Has anybody been paying attention to NY governor Cuomo? He figured out too late that if you chase the rich away, there is nobody left to pay the taxes. Cuomo is even willing to cook the millionaires dinner to get them back.
    NJ did that about a decade ago and realized their mistake but Trenton has forgot that lesson again too.


    1. Great example of why liberals are students of the Einstein school of insanity – “Insanity is doing the same thing over and over and expecting different results.” (maybe he said it, maybe not).

      Martin O’Malley, former Maryland Governor and presidential candidate showed what folks can expect from Bernie Sanders-like “millionaires” and “billionaires” taxes. See:

      The French also learned this lesson the hard way in their attempt to tax wealth (a la Liz Pocahontas):

      So, when Joe says the higher income should pay their fair share, ask him who is higher income and what percentage of their income / wealth should the federal, state and local governments have a claim on. Idiots like Joe believe all your wages and wealth belong to the federal government, and to the extent they let you keep some, they call it a “tax expenditure”.

      These idiots patter George Orwell everyday when it comes to describing their policies.


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