Biden 401k – Taxed Twice?

Hmm, this is interesting. Seems like it would be better than the current system for anyone in a tax bracket under 26%. For someone in one of the tax brackets above 26% whether it’s still worth contributing would probably depend on how many years of tax-free compounding you will get and your expected retirement tax bracket.

We normally use effective tax rates, not tax brackets, during accumulation in making t vs Roth calculations.

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.

Say you contribute $10,000 now and you are in the 25% bracket.  You save $2500 on taxes, but you’ll pay taxes when you withdraw.

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.

If it is a Roth 401k, then this is a $2600 tax credit we don’t have now.  WooHOO!  That’s obvious.  The article says it’s meant to bring fairness between high and low earner, which an extra tax credit would not do. Therefore it is not a Roth 401k. 

The $2600 tax credit is essentially a rebate of the taxes you paid on your contribution, so you are really only taxed at withdrawal.  If you are paying taxes over 26% on contribution, than that could be paid twice.

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. 

This plan looks like it would create a crazy bonus for Mustachians in the 12% bracket. Which, for MFJ is effectively $105k with the two standard deductions!

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… 🙂

It is double taxation (now and later) if you are in the 32% tax bracket or above, and in the 24% brackets and below it is a tax credit now and single taxation later.  In the 24% bracket it is close to being a wash with the old law, though.

So that first round of taxation will result in increased tax revenues in the near term for the Federal government.

Thinking about it more the Roth ladder while working plan is worth doing for anyone in the 12% bracket and maybe even the 22% bracket. I meant a 4% bonus on 39k is still a free $1,560 right? The lottery is a tax on people who are bad a math and this is a tax credit for people who are good at math and don’t make too much money… Assuming it passes, it remains to be seen if will actually encourage people of the H&R Block persuasion to save more for retirement or to even to do some paperwork and planning for free money.

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?

My son asked me a few weeks ago what I knew about the Biden 401k plan.  He was concerned.  I said, I don’t know anything, but I’m sure if it gets any traction I’ll hear more.

I love these boards.  Thank you all!

Is this supposed to be handled during payroll – or at tax time?

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.

From a public policy perspective, I think the Biden proposal makes more sense than current law. If the goal of these tax advantaged accounts is to encourage people to save for retirement, shouldn’t the amount of encouragement be the same for everyone?

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.