It has only been a couple of days since the start of Biden’s presidency and the proposals are slowly coming in. Biden’s proposal to the 401(k) changes are going to replace many of its aspects and provide a more equal opportunity for workers earning a wide variety of income.
The biggest change to the 401(k) will be the tax benefits of the contributions if the proposal is accepted. The contributions made to traditional or other qualifying 401(k) retirement accounts are deductible. This is a tax benefit most workers get. With the Biden 401(k) changes, this will be replaced with a tax credit.
The more you earn, the more contributions you can make to a 401(k), thus, this increases the tax break of the higher earners. With the proposed change, the tax break will be the same regardless of how much you earn.
Tax Deductions Converted to Credits
As a worker who earns $70,000, you get about $1,200 to $1,500 in tax breaks with your 401(k) contributions. On the other hand, a higher earner with $300,000 income can get up to $4,000 in tax breaks.
The tax break is uneven based on the gross income earned. If the proposed 401(k) changes were to be passed by the Congress, the new changes will help low to moderate income earners get a higher tax benefit for their contributions. This will reduce the tax benefits high income workers get though.
So if Biden’s proposed changes were to be passed, low income earners will get a higher tax break and highly compensated employees will get a slightly reduced tax break.
Millions of Americans still don’t qualify for 401(k) tax benefits because their employers don’t offer them such a retirement plan. The proposed plan will create an automatic 401(k) for employees who don’t have access to it.
If the newly proposed 401(k) retirement changes were to be passed, employees who work at companies where 401(k) retirement plans aren’t offered will have access to an automatic 401(k) where they can contribute and invest for retirement.
Although this means no employer matching since it isn’t offered by the workplace, the employees will get to contribute to a 401(k), creating an option for tax benefits.
At the time of writing, about one third of workers aren’t eligible for 40(k). This could shift with the proposed changes by the Biden administration. The 2021’s 401(k) contribution limits can grant a high tax break to low to moderately compensated employees while reducing it lightly for highly compensated employees.