We wanted to share a quick update on an overlooked part of Vice President Joe Biden's tax plan which he and his team put forth in July.
Vice President Biden has vowed to convert the current deductibility of traditional retirement contributions into matching refundable credits for 401ks, IRAs and other plans (e.g. SIMPLE plans). This conversion would essentially overhaul the tax preferences of traditional (non-Roth) retirement accounts.
Under current law, workers contribute pre-tax dollars to the accounts, reducing their annual taxable income. When the funds are eventually withdrawn in retirement, that money is taxed. But the system tends to disproportionately benefit wealthier earners since deductions are more valuable the higher one's income bracket is. For instance, a taxpayer in the top income bracket would receive a $37 benefit for every $100 contributed to a retirement account. By comparison, a taxpayer in the bottom bracket would get just a $10 benefit in exchange for the same $100 contribution.
The Vice-President's proposal would eliminate deductible traditional contributions and instead provide a 26 percent refundable tax credit for each $1 contributed. The tax credit would be deposited into the taxpayer's retirement account as a matching contribution. If taxpayers contributed $100 into a traditional retirement account, the 26% credit would be the equivalent of a 20.5% marginal tax rate for all taxpayers, regardless of their income level
This proposal would be paired with additional changes, such as establishing an “auto-IRA” for lower-income Americans.
We hope you found the above helpful. And again, we are available if you have questions, concerns or need assistance.