On January 20, 2021, Joe Biden became president. But, what kind of policies has he implemented since?
Well, the Biden administration is aiming to make the income tax system more progressive. Biden’s plan would also raise taxes by $2.4 trillion over the next ten years.
Meanwhile, the Biden administration wants everyone making more than $100 million to pay at least 20% of their income in taxes. This would include unrealized capital gains. Currently, these are not taxed.
And, at the same time, SECURE 2.0 passed the House on March 29.
“The retirement savings legislation, also known as SECURE Act 2.0, expands on the original SECURE Act and includes provisions to boost the required minimum distribution (RMD) age from 72 to 75 overtime, broaden automatic enrollment in retirement plans, and enhance 403(b) plans,” clarifies David Nadelle for GoBankingRates.
“The original Setting Every Community Up for Retirement Enhancement (SECURE) Act was passed into law by former President Donald Trump in December 2019.” RMDs, contributions to traditional IRAs, and loans taken out of 529 plans were all altered by this legislation. This also made annuities more readily available to 401(k) plan administrators.
“It also requires 401(k) and 403(b) plans to automatically enroll participants when they become eligible, though employees may opt-out of this coverage,” adds Nadelle. “The automatic enrollment amount starts at a minimum of 3% of salary.” However, “no more than 10% — followed by a 1% increase each year until it reaches said 10%.”
Suffice to say, Biden’s retirement plan, as well as Congress, have a big plan for your retirement savings. But, here are 4 things that you need to watch out for.
1. Tax Benefits of Retirement Savings
As part of President Joe Biden’s budget proposal for 2022, the top rate will rise to 39.6%. What’s more, this specifically applies to capital gains and dividends. However, only for people with an adjusted gross income of over $1 million.
Because of the tax hikes, high-income investors might be tempted to invest elsewhere. Where? Most likely into tax-free retirement accounts like Roth IRAs. However, it could also benefit those with 401(k)s. The reason is that they’ve deferred their taxes until retirement.
How retirement accounts will be impacted.
In Biden’s budget proposal for 2022, tax-advantaged retirement accounts like Roth IRAs and 401(k)s are gaining traction. Why? Because these could be a way to reduce capital gains taxes and grow capital.
If, for example, an investor moves money into a Roth IRA, they will be required to pay taxes upfront. Then they can withdraw tax-free after turning 59 1/2. High-income investors would benefit from lower rates now.
401(k)s allow investors to defer paying taxes on their investments until they withdraw them. To reduce their income, they can limit the amount they take out of it. That gives them more tax flexibility.
Biden’s budget proposal appears to be targeted mostly at high-income taxpayers. But, low- and middle-class Americans can also be affected in a variety of ways. An example of this could be the value of a retiree’s retirement portfolio changing if the tax hike causes stock market sell-offs.
According to Fidelity’s president of employee benefits, Kevin Barry, though, “the stock market’s recent performance provided a boost to retirement savings balances.” In addition, Barry explained that investors are able to choose how much to save in their retirement accounts.
Also, Biden wants caregivers to be able to catch up on their retirement contributions. This means they can contribute more than the annual limit to their 401(k). Currently, you have to be employed to contribute to a retirement plan. And, catch-up contributions are available only to individuals 50 and older.
Based on a bipartisan bill by Representatives Jackie Walorski and Harley Rouda, this “would allow individuals that took at least one year out of the workforce without receiving an earned income, for the purposes of caring for a family member, to make catch-up contributions in years prior to age 50 to their 401(k) plans, individual retirement accounts (IRAs), and other eligible retirement accounts.”
2. Expanded Social Security Benefits
Are Social Security benefits in jeopardy? If you’re like me, you’ve probably heard this most of your life.
Why’s that a problem? This would result in beneficiaries receiving just over 80% of what is owed to them.
Well, the Biden is trying to fix this — and more.
- Raise Social Security’s minimum benefit. A monthly Social Security benefits averages about $1,400. Most people, however, do not receive that amount. In fact, many get a lot less. A beneficiary who has worked at least 30 years under Biden’s proposal would receive a yearly benefit equivalent to 125% of the federal poverty level.
- Increase the benefit for older Americans. Biden wants to increase the benefits beneficiaries receive. The catch? Once they have been receiving Social Security for more than 20 years.
- Enhanced benefits for some beneficiaries. Several groups would benefit from Biden’s proposal. As an example, he would let the surviving spouse keep a significant share of benefits. Also, public employees and teachers would get better benefits.
Taxes, of course, are what pay for all of that. As part of Biden’s plan, employers and employees would pay 12.4% of earned income above $400,000 as Social Security payroll taxes. In the current system, there is no payroll tax for income over $137,700. Therefore, those making between $137,700 and $400,000 would not be taxed under Biden’s plan.
3. The Impact of Climate Change
“The Biden administration is giving an assist to self-directed retirement plans struggling to keep up with an investment landscape that’s rapidly turning a more vibrant shade of green, easing Trump-era restrictions and hinting at broader guidance that could make investing to protect the environment a default choice,” writes Austin R. Ramsey for Bloomberg Law.
Despite congressional infighting, the administration wishes to proceed with an ambitious climate change agenda. As a result, President Biden will leverage Labor Department control over employer investments to help guide the hard-earned money employees invest in 401(k) plans and small private pensions through the risky waters of environmentally-conscious investing, he adds.
But, how exactly does climate change affect retirement plans?
Unprecedented heat waves, year-round fire seasons, and coastal flooding indicate that climate change is occurring. “Companies combating that trend by supporting alternative energy or reducing emissions stand to reap huge financial rewards, while coal, oil, and gas companies face increasing pressure from investors and an uncertain future,” says Ramsey.
Stock performance and dividends, as a result of these financial risks and rewards, trickle down to investors. “Most 401(k) participants access the market through a set of funds they choose, each of which stacks their portfolios to eliminate risks and maximize the return on investment.”
Despite this, retirement plans themselves have a lot of clout. In the US, retirement accounts hold about 37% of the $22.8 trillion in outstanding stock. “That’s the largest total share of investments of any other asset class by far, outstripping taxable brokerage accounts, insurance, and nonprofit investments combined,” Ramsey explains.
It doesn’t matter how most U.S. retirement plans invest; companies that receive the investment and stock markets will benefit.
4. Tax Laws Related to GRATs and Other Trusts
For income tax purposes, the holder of a grantor trust is deemed to own the trust assets. Grantors may use this arrangement to manage trust assets without realizing gains and to pay income taxes without having their gifts considered taxable, explains the team over at U.S. Bank. As such, Grantor Retained Annuity Trusts (GRATs) and other forms of trusts would likely be affected by several provisions of the new proposals.
Except where noted otherwise, all proposed changes could take effect after the new tax law becomes effective.
Minimum and maximum value requirement for a GRAT.
At present, there is no minimum GRAT amount. What’s the plan if you want to qualify for a tax break inside the GRAT? Restricted assets must have a minimum value of either $25,000 or $500,000. Also, the GRAT must last at least ten years. And, the annuitant’s life expectancy may not exceed ten years.
Asset sales in grantor trusts.
An irrevocable grantor trust’s sale to its deemed owner is not taxable. However, here’s the purposed change. When an irrevocable grantor trust sells an asset, the seller must recognize an income tax gain on appreciation in the asset in accordance with income tax legislation.
Tax treatment of income paid by owner.
As of now, the tax due from a trust is not considered a gift if the deemed owner pays the tax due. There is a proposal that “if the deemed owner of the trust pays the income tax due from the trust, this would be a gift unless the trust reimburses the owner for the tax payment.
Value of promissory notes.
Estate planners typically use a grantor trust to sell appreciated assets for a promissory note. The updated requirement would be that notes have enough interest to avoid below-market status. For gift and estate tax purposes, you use a discount rate based on the remaining term (AFR) or actual interest rate.
Limit to generation-skipping transfer tax exemption.
If a trust gets enough generation-skipping transfer tax exemptions, it’s GST-free forever.
GST trusts and direct transfers to beneficiaries no more than two generations below the transferor (grandchildren) would be exempt from GST tax. Those born after the trust was created would get the same tax treatment. Terminations of GST trusts, while any of these people are beneficiaries, would be taxable as well.
Frequently Asked Questions About Biden’s Retirement Plan
How much will my taxes increase under the Biden tax plan?
The Biden plan would not increase taxes for individuals earning less than $400,000. Most people’s taxes would be reduced and expanded by tax benefits like earned income credits and child care subsidies.
Due to this, corporations, as well as taxpayers making more than $400k, would face higher taxes under the Biden tax plan. Additionally, the top marginal tax rate for individuals would return to 39.6%. Also, step-ups in basis for equity and hedge fund managers would be removed.
How will this tax plan affect your retirement accounts?
Tax reform could profoundly affect retirement planning. The new proposal may make 401Ks less appealing to high-income earners. Why? Because of the tax benefits reduction. A Roth IRA may be the better option. As a result, you may need to adjust your retirement contributions.
Is Social Security really going broke?
“As long as workers and employers pay payroll taxes, Social Security will not run out of money,” notes Andy Markowitz, AARP. “It’s a pay-as-you-go system: Revenue coming in from FICA (Federal Insurance Contributions Act) and SECA (Self-Employed Contributions Act) taxes largely cover the benefits going out.”
The Social Security system faces funding chances. At the end of 2020, it will have a surplus of $2.9 trillion, having collected more than it has paid out for decades. “But the system is starting to pay out more than it takes in, largely because the retiree population is growing faster than the working population, and living longer,” he explains. “Without changes in how Social Security is financed, the surplus is projected to run out in 2034.”
In any case, Social Security won’t go bankrupt. It will continue collecting taxes and paying benefits. “But it will only bring in enough to pay 78 percent of scheduled benefits, according to the latest estimate,” Markowitz adds. “To avoid that outcome, Congress would need to take steps to shore up Social Security’s finances, as it did in 1983, the last time the program nearly depleted its reserves.”
How much can I contribute to my retirement account?
401(k) and IRA contribution limits for Internal Revenue Service (IRS) accounts are inflation-indexed. That means they increase each year.
- 401(k) Plan: $19,500 for 2021 and $20,500 for 2022
- Traditional IRA: $6,000 for 2021 and 2022
- Roth IRA: $6,000 for 2021 and 2022
- SIMPLE IRA: $13,500 for 2021 and $14,000 in 2022
For those 50 or over, you can contribute an additional amount of money. The IRS calls this a catch-up contribution.
- 401(k) Plan: $6,500 in 2021 and 2022
- Traditional IRA: $1,000 in 2021 and 2022
- Roth IRA: $1,000 in 2021 and 2022
- SIMPLE IRA: $3,000 in 2021 and 2022
The SECURE Act 2.0 would increase the amount of catch-up contributions allowed to older Americans. This would namely apply to those 62, 63, and 64.
- 401(k) Plan: $10,000
- Traditional IRA: No increase, but inflation-indexed catch-up limit of $1,000.
- Roth IRA: There is no set increase, though the catch-up limit is indexed to inflation.
- SIMPLE IRA: $5,000, indexed to inflation.
This contribution will only last three years. What if you’re 65 and older. The regular catch-up contribution limits will still apply to you.
How much does the president really affect your retirement savings?
Americans tend to overestimate the power of the president. This is particularly as to how much change one person can achieve. There is no doubt the president is president. However, our government doesn’t get much done without teamwork. You can thank our system of checks and balances.
So, even if the President uses executive orders, they must still work with Congress in order to pass major legislation.