Some investment advisors see potential benefits to presidential candidate Joe Biden’s proposal to replace the 401(k) plan tax deduction with a tax credits.

While designed to help middle-income America, it remains unclear if the proposal will actually create any more incentives for the average American worker to stash more money into their retirement plan—if they’re lucky enough to have one, according to financial advisors.

The Biden proposal restructures the 401(k) contribution incentive by replacing the deduction with a tax credit, which is estimated to be 26%. Presumably, the tax credit would be refundable so that even workers with no tax liability would benefit from putting $1,000 into a 401(k) plan. As under current law with non-Roth plans, earnings would continue to accrue tax-free, and withdrawals at retirement would continue to be taxed as regular income.

The proposal, which Biden has yet to flesh out, may actually have more negatives than positives, said Robert Friedman, founder of Central Park Financial Planning in New York City.

“For middle-income people, the incentives would stay about the same since the tax credit rate of 26% is about what their marginal tax rate likely is already,” he said, adding that the tax credit probably wouldn’t be attractive to wealthier folks who instead might opt for taxable accounts or Roth accounts “if they still exist.”

“While this would create an incentive for lower or no-income people to save, their biggest impediment to savings tends to be a lack of money rather than inadequate tax incentives,” Friedman continued. “The exceptions tend to be children of well-off people, which I don't think is a target of Biden's proposal.”

Under current law, workers contribute pretax dollars and thereby reduce their annual taxable income, but they pay full tax freight when funds are eventually withdrawn in retirement. The upfront tax break is larger for richer households, however, since deductions are more valuable the higher one’s tax bracket is.

For example, take a single filer in the top 37% bracket making $600,000. For each $1,000 she contributes to a 401(k) plan, her tax deduction is worth $370. A single filer earning $60,000, however, would be in the 22% bracket and only receive a $220 tax break for that same $1,000 contribution.

What’s more, upper-income earners tend to save more in 401(k) plans, which have an annual cap that rises with inflation. In 2020, the limit is $19,500, with an extra “catch-up” contribution of $6,500 allowed for those 50 or older. The more pretax dollars set aside, the larger the tax break is.

Workers can also save $6,000 in 2020 in traditional individual retirement accounts, or $7,000 for those 50 or older. Such contributions are fully deductible unless one or both spouses also have a workplace retirement plan, in which case the deduction phases out for higher earners.

Biden’s plan would “equalize” the incentive system by ending such deductions and replacing them with flat tax credits for each dollar saved. Under this plan, someone earning $600,000 would get the same tax break as someone making $60,000 — an identical $260 tax credit for their $1,000 retirement contribution. The credit would also be refundable, so someone earning too little for the credit to fully offset their income tax liability would still get the full tax credit.

Robert E. Schultz, a partner in Atlanta-based Rollins Financial Inc., said the devil will be in the details of Biden’s plan, if and when he has the opportunity to flesh it out. 

“Anything that promotes a way for people to save for their retirement is a benefit,” Rollins said. “The problem that is not really addressed, though, is that not everyone has access to a 401(k). A change that would allow for those without access to have access would be a big move in the right direction.”

Thomas I. Rindahl, a financial advisor with TruWest Wealth Management Service in Scottsdale, Ariz., said he favors any plan that would encourage more consumers to sock money away for retirement, but is uncertain the tax credit alone would do that.

“Tax credits are generally better for the taxpayer than tax deductions,” Rindahl said. “I think this will encourage many employees to utilize their 401(k) options at work. But remember, what the big print giveth, the small print will taketh away.”

In contrast, Sterling D. Neblett, founding partner at Centurion Wealth Management in McLean, Va., sees the Biden proposal as “an amazing opportunity” for investors.

“The arbitrage between having dollar-for-dollar tax credits and taxable income on the future distributions can save individuals anywhere between 50 cents to 80+-plus cents on the dollar,” he said. “Add compounded growth to the equation and the savings is even larger.”

While it’s not clear how much more lower-income earners would actually save overall, despite bigger tax incentives, what is clear is that the securities and insurance industries have already signaled they will oppose the proposal, which they fear would push many investors out of 401(k)-style products.

The Investment Company Institute, which represents the mutual fund and exchange-traded fund industries,  successfully opposed the House GOP’s “Rothification” proposal in 2017 and says it will fight efforts to replace tax deductions with a flat tax credit.

“ICI 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,” the group said in a statement.

ICI and President Trump worked in tandem in 2017 to cut a revenue raiser that would have limited 401(k) plan deferrals to $2,400 annually, with any excess savings directed into Roth-style after-tax accounts.