“[The current] system provides upper-income families with a much stronger tax break for saving and a limited benefit for middle-class and other workers with lower earnings," he said. "The Biden [tax] plan will equalize benefits across the income scale, so that low- and middle-income workers will also get a tax break when they put money away for retirement.”
“For the 2% of the Americans that are in the highest tax bracket, I think there is a real sense of urgency to be doing a Roth conversation,” Mioli said. “The writing is on the wall; their tax is definitely going up. Why not get the tax man out of the way now?”
In addition, Biden has called for an overhaul of 401(k) tax breaks, which would expand retirement savings subsidies for lower- and middle-income Americans.
As an example of how this works, Mioli said higher-income earners in the 37% bracket save 37 cents on the dollar when they make a contribution to their 401(k), whereas if someone in the 22% bracket makes a contribution, that person only saves 22 cents on the dollar. “What Biden says is that’s unfair—we shouldn’t incentivize higher-income earners to put more away when most of the people in the lower bracket maybe can’t even max out on a 401(k) because they don’t have that kind of money to put in,” he said.
Mioli noted that while the details have not yet been worked out, it appears that the middle ground for all will be 26%. “For lower-income earners in the 24%, 22%, 12% brackets, that’s going to be a pretty good deal,” he said.
“But for those in the 32%, 35%, 37% brackets, all of a sudden, the tax write-off for a 401(k) contribution isn’t as juicy,” Mioli said. “If I were in the 37% bracket, what I would be doing is a 401(k) Roth IRA contribution," he said. "Let’s say 50% of my contribution to the Roth or more and then maybe some to my traditional 401(k)."
“The juice isn’t worth the squeeze to write off pre-tax money now knowing that I am going to have to pay the tax man later on,” Mioli said.
If Biden wins the election, Mioli predicts there is going to be a large increase in high-income earners transitioning to Roth 401(k)s. “Most people in the high-income bracket can’t make a contribution as it is because there is an income limit,” he said. “So how do we get around that? Well, there is a Roth 401(k) option,” Mioli said.