Biden proposes 401(k) changes to give low-income savers bigger tax benefits
Posted September 19, 2020 8:57 a.m. EDT
CNN — Democratic presidential nominee Joe Biden has a plan to change 401(k) retirement savings accounts to give low-income earners a bigger tax break up front.
The plan, which calls for changing the way 401(k) accounts are treated in the tax code in order to encourage low earners to save more, would likely mean higher earners would see a smaller tax break than they do now.
Even if Biden is elected, the plan would have to be approved by Congress.
US economy: Send us your stories about financial struggle
Biden's campaign proposal is vague on some key details, but here's how it could work. The current system -- which allows savers take up to $19,500 in income-tax deductions every year -- would be replaced with a flat refundable tax credit.
The Tax Policy Center assumes that credit would be equal to 26% of anyone's retirement contribution, regardless of their income.
The Biden plan doesn't mention changing the contribution cap, which is currently tied to inflation.
Couples filing jointly who earn roughly up to $80,250 would benefit from such a change, while those in the higher brackets would lose some of the value of the tax benefits when compared with current law, according to an analysis by the Tax Foundation.
Biden is also proposing to establish automatic retirement savings accounts for workers who don't already get 401(k)s or pensions from their employers.
Since 2016, several states have created their own retirement accounts for those workers. But a federal initiative created by the Obama administration, called myRA, was shut down after about three years because of a lack of demand. In 2017, Republicans in Congress repealed an Obama-era rule that had paved the way for states to create their own retirement plans. It hasn't halted the states' efforts, but it left a chilling effect.
Some Republicans floated a proposal to decrease the contribution limits for 401(k)s in 2017 amid negotiations over their massive tax overhaul legislation, as a way to raise tax revenue. But the final law ultimately left retirement plans untouched.