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Biden Wants to Gut the Tax Benefit of 401K Plans

June 23, 2021 By The Editors

Vice President Joe Biden to deliver the keynote address at the Caribbean Energy Security Summit, at the U.S. Department of State in Washington, D.C., on January 26, 2015. [State Department photo/ Public Domain]

Originally posted on September 22, 2020.

Joe Biden wants to gut the tax-benefit of 401K plans. Americans have $6.2 trillion in 401K plans with another $11 trillion in IRAs that are partly from “rolled over” 401K assets. Over 42% of American families participate in 401Ks and plans like them.

What is Biden’s beef with the 401K plan?

Biden doesn’t like that higher-income Americans get a bigger tax deduction on 401K contributions than lower-income Americans. He says it isn’t fair.

Why does fair always mean you need to pay more taxes to a federal government that delivers the same services to every American?

Biden wants to replace the tax deduction for 401K contributions with a 26% tax credit. So if your marginal tax rate is 37% (39.6% under Mr. Biden’s proposal), that tax benefit of a 401K contribution will decline by 35%.

This proposal along with most of what Biden wants to do with respect to taxes and investment incentives needs to be stopped in its tracks.

The WSJ has more

A less-noticed part of Mr. Biden’s plan might. It would create “automatic 401(k) plans” for nearly everyone by giving businesses subsidies to set them up. This wouldn’t rock the boat for 401(k)s’ biggest fans—current savers. Surprisingly, though, investment firms have lobbied in the past against state-level plans to start automatic IRAs.

A seemingly tiny detail might spell the difference between success or failure for any automatic option: Will participants be asked to opt in or opt out? Experience shows that people are far more likely to save when it is the default option. Companies that automatically enroll employees in 401(k)s instead of requiring them to opt in have seen new hire participation in 401(k) plans rise to 86% from 57%, according to the Tax Policy Center.

But there are even more radical ideas in the graveyard of retirement bills that never got a congressional vote. One that fund companies hate would be a single, low-fee pooled investment. Even when they do contribute, 401(k) savers jump in and out of expensive mutual funds to chase returns. Another, which small businesses would hate, is forcing them to make some contribution to the funds. One nearly everyone supports is making plans portable so that people don’t cash out or forget about savings when they change jobs.

Now that 401(k) plans are on the table, the changes need to be more than just rearranging the deck chairs on the Titanic. The retirement iceberg is coming into sight.

Read more here.

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