Biden's dramatic change to retirement accounts could reduce their availability, industry warns
Former Vice President Joe Biden’s presidential platform includes a tax proposal that could force some employers to abandon offering retirement options to workers, the industry is warning.
The plan would dramatically change the incentive to save for retirement by replacing the current deferral system with a tax credit.
Most retirement plans, such as 401(k) plans and IRAs, allow taxpayers to delay paying taxes on contributions to accounts until they are retired. By suspending this tax until retirement, workers have been able to grow their nest eggs beyond what they would have been if taxes were paid in the year that the money was received.
Biden would like to replace the current system with a tax credit. His campaign site does not lay out a rate for the credit, but it has been reported to be 26%.
Applying a 26% rate, the federal government would provide $26 for every $100 a worker invests in their retirement account. The impetus is to create a level playing field so all taxpayers receive the same tax benefit irrespective of their income or tax liability. For example, a $100 deposit would create a $26 tax credit independent of a taxpayer's income or tax bracket.
The retirement advocacy group, AARP, recently proposed the policy as an option to promote retirement savings.
Under the Biden plan, that $100 would be taxed in the year it was earned. So, a taxpayer in the 32% tax bracket would pay $32 in taxes, meaning that $68 would be invested in the retirement account.
After adding the $26 from the federal government, the total amount invested would be $94. The money would be invested directly in the taxpayer's retirement account to ensure it is used as intended.
Under the current system, $100 would have been invested in the retirement account.
Biden’s plan would be advantageous for lower-income workers. For example, a taxpayer in the 12% tax bracket investing $100 in a retirement account would receive $114 after paying taxes and receiving the credit.
Some retirement industry experts think Biden’s proposal could force some companies to abandon their retirement plans.
Brian Graff, chief executive officer at the American Retirement Association, cautioned that employers, who normally pay taxes in the upper brackets, could oppose Biden’s plan because they lose much of their tax benefit.
“What we’re worried about is if you are essentially reducing the tax benefit, it’s not going to be worth it for them to keep the plan going,” he said.
Employers who make contributions to a 401(k) must offer that same benefit to their employees. However, some of those bosses might not want to continue offering a 401(k) if their tax benefit is greatly reduced.
“If it’s not worth it to the owner, [why] bother with it anymore?” Graff said.
Richard Rausser, senior vice president of client services at Pentegra, said that such a fundamental change to retirement accounts could be a deterrent to offering a plan.
“To the extent that there’s a change in taxation of salary deferrals … that’s going to be a disincentive for plan sponsors to adopt a plan, or for some of them, quite honestly, to continue to maintain a plan. They may rethink it,” he said.
On the other hand, Paul Richman, the chief government and political affairs officer at the Insured Retirement Institute, said there is not enough detail about Biden’s plan to render a decision.
He said, however, that his organization backs the current system of delaying tax payments until retirement.
“We support tax deferral,” he said. “We do agree that tax deferral that’s in place now works.”
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