Here’s How Biden’s 401(k) Plan Would Affect High Earners. A Split Congress Stands in the Way.

Biden’s plan would institute tax credits for each dollar saved, leveling the playing field by offering the same incentive for retirement saving regardless of a worker’s income. He hasn’t said what percentage the credit would be, but the Urban-Brookings Tax Policy Center has estimated that a 26% credit would be roughly revenue-neutral over the first 20 years and beyond.

Currently someone who is single and making $120,000 falls into the 24% tax bracket. If he contributes $18,000, or 15% of his pay, to his 401(k), he would save $4,320 in taxes. But a single filer making $50,000 falls into the 12% tax bracket. If he contributes $7,500, or 15% of his pay, he would save $900 in taxes.

Assuming a 26% credit under Biden’s plan, the person earning $120,000 and contributing $18,000 to his plan would receive a tax credit of 26 cents on each dollar, or $4,680. However, the person earning $50,000 and saving $7,500 in his plan would receive a credit of $1,950, more than double what he would now save on taxes.

The initiative faces opposition from some asset managers and investment industry trade groups. Asset managers have in the past opposed plans that they feel might decrease usage of defined-contribution plans.

The Investment Company Institute, which represents mutual fund firms, said after news of the plan that it “supports tax deferral and the current, voluntary employer provided retirement system—and, as in the past, will oppose changes that undermine the success of this system for American savers.”

Howard Gleckman, senior fellow at the Urban-Brookings Tax Policy Center, said it’s unlikely that a Republican-controlled Senate will approve of Biden’s plan as is. But it wouldn’t be hard to imagine a compromise combining Biden’s tax credit approach with some version of two retirement savings bills that already have broad support in Congress – The Securing a Strong Retirement Act of 2020, the so-called “Secure Act 2.0,” and the Retirement Security and Savings Act, Gleckman says. Some combination is natural, he says, since all the ideas have the same goal: to increase retirement savings for workers.

Biden’s plan to change the tax benefit across the board isn’t in the other two bills, which would retain the existing deduction model. The Securing a Strong Retirement Act of 2020, for example, would keep the basic deduction for most who contribute to IRAs, but would simplify and expand the existing saver’s credit, which offers a savings incentive for households with modest incomes.

One alternative would be to make the credit proposed by Biden optional, Gleckman says. While that would be costly and complicated, it would appeal to lawmakers, he says.

If the Biden tax credit plan were put in place, it could push some higher earners into Roth 401(k)s, in which they contribute after-tax dollars that can then be drawn down tax-free in retirement, says Ed Slott, a certified public accountant and individual retirement account expert in Rockville Centre, N.Y.

Regardless of the plan’s fate, Slott advises retirement savers to evaluate their situation “with a strong bias toward” Roth 401(k)s, or Roth IRAs if their income allows, both of which allow them to lock in today’s low tax rates.

Corrections & Amplifications

Under current rules, a single worker who makes $50,000 and falls into the 12% tax bracket and contributes 15%, or $7,500, of his pay to a 401(k) would save $900 in taxes. Assuming a 26% credit under President-elect Joe Biden’s 401(k) plans, this same worker would receive a credit of $1,950. An earlier version of this article incorrectly calculated the contribution level.

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