Giving a tax credit and Roth status would be quite the bonus to everyone, except that it wouldn’t make any sense from a tax revenue perspective.
Getting fewer high income people to shelter their income is a feature, not a bug.
Under Biden plan, you contribute after tax, so you’d have to earn $13,333, paying $3,333 in taxes, to contribute $10,000. You’d then get a 26% tax credit for $2600. So it looks like you made an extra $100, but really you paid an extra $733.
Would it still be worth it if you were paying a lower tax rate on withdrawal? I’ve never run numbers over 25% tax rate — never had that high of an income.
Max out 2 401ks for 39k and get a tax credit of $10140 – 4680 = $5,460 on top of deferring tax. If the code doesn’t change (highly unlikely) the first $25100 is a 0% and then the marginal rates kick in from there. A Mustachian couple pulling 60k a year is looking at approximately a 6% effective tax rate meaning that 26% credit becomes a 20% bonus… This all seems a little to sweet to be sustainable but maybe there are so few of us who would do it that it won’t matter?
It seems like someone who wants to barista fire could get even more with planning. Assuming a Roth that has sufficient funds to support this ladder for 5 years. A couple earns 39k and contributes all of it to 401k so they get the $10140 credit above. Rolls 29k into their Roth and pays $390 in taxes after the 2 standard deductions. They can then pull 29k from the Roth to live on. Presto! a $38,750 a year life with an effective tax rate less than 1%. Of course only people on this forum are ever likely to do something so complicated… 🙂
So that first round of taxation will result in increased tax revenues in the near term for the Federal government.
On that thought… Can I contribute my wife’s earnings to my i401k as “employee contribution” or does the business actually need to have earnings?
I love these boards. Thank you all!
If at tax time, some people may not be able to contribute as much, may have the exact opposite effect for those that need it most.
Seems difficult to implement via payroll, but that is where it would be the most helpful.
With current law, say two different people contribute the same $10,000 to their retirement accounts, one might receive a $1200 subsidy and the other might receive a $3500 subsidy. Under this proposal, each would receive a $2600 subsidy.
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