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.