Joe Biden is decidedly in favor of socialism, as is his party these days. He’s now looking to socialize retirement accounts, although the end result will not be what he expects.
If Joe Biden becomes President, and if he manages to gain the power to put his and the ideas of his socialist colleagues in the Democratic Party to work, the way we understand retirement accounts will change.
In 1978, with more and more people losing their pension plans at work, Congress updated the Revenue Act to include a new section, section 401(k). This might not be the catchiest of names, but it caught on, and just about everyone knows what a 401(k) retirement account is these days.
People now had to save up for retirement on their own, and while employers often help out by matching employer contributions, the IRS wanted to lend a hand as well, so they offered taxpayers a way to defer tax amounts owed on contributions to their 401(k) until cashed in.
The idea here is that people’s incomes generally are lower in retirement, and by deferring paying the tax on the amounts they have saved until then, they may pay a lower tax rate. Less well understood, but even more important, is that we can invest what would otherwise be the Treasury’s money for years and keep the after-tax profit on this money for ourselves.
When we put both of these benefits together, this can have us preferring traditional 401(k) accounts over Roth ones, where with a Roth account, you don’t get a tax deduction but instead see your savings grow tax-free.
Joe Biden is certainly looking to change the landscape of traditional retirement accounts, where the only changes that we’ve seen over the years is increasing amounts that we can shelter each year from taxation.
Under the current scheme, the entire federal tax on contributions is deferred, where if you are in the highest tax bracket, you will get a tax credit for 37% of your contribution. Those in the lowest tax bracket receive a 10% credit on whatever they put in traditional plans, and this not only applies to traditional 401(k) accounts but also to traditional IRA accounts, the personal version of the employer provided 401(k).
The reason why these tax credits differ is because their rate of taxes differ accordingly. You owe 37% in tax, or 10%, and the credit offsets this tax whereby the tax owing on contributions gets pushed forward.
What Biden wants to do is to invite his favorite superhero, Robin Hood, to the party, and Robin is looking to force those in higher than average tax brackets to directly support those in lower tax brackets.
Biden wants one tax credit rate for everyone, which might seem reasonable if you haven’t thought this through enough, and you’re going to especially like this if you are one of the people Robin Hood gives to rather than takes from.
Looking at How This is Supposed to Work
The people who do get money taken from surely will object though once they see this plan in action. Let’s say Donald is in the 37% bracket and Joe is in the 10% bracket. For every $1000 Donald contributes, he is taxed at 37% but only gets a tax credit of the number Joe has picked for him, expected to be 26%.
Donald now has to pay an extra amount of tax this year, and 11% of all of his contributions both have full taxes due on it now and at withdrawal as well. This is double taxation, pure and simple.
The amount that both contribute to their traditional retirement accounts are completely fully taxable later, when withdrawn, and the twist that Joe through is not just looking to tax Donald more, as fun as that may be, it actually involves a direct transfer of funds from Donald to Joe, this extra 11%.
The tax man, our friend Robin Hood, barely touches this 11%. He only takes possession for as long as it takes to hand it over to Joe, who has a very nice tax return coming to him thanks to this generosity.
You can read about this story elsewhere, and hear things like Joe has already broken his promise of no new taxes for those who earn under $400k, as this retirement net catches plenty of them in it. All you have to do is earn over $80,250 and you may expect Robin to come calling with his hand out.
This is actually just one of several tax hikes that people making less than this will be paying under the Biden plan, and this includes his jacking up the tax rate on capital gains and dividends, as well as his corporate tax hike which gets passed down to everyone who breathes.
We always want to give you more than just the story, and while some are mentioning how higher bracket folks will now be driven toward Roth accounts, which is definitely true, they don’t realize that this avoids the problem, and we’re not seeing anything mentioned about the windfall this will create for lower bracket folks, or how this all plays out economically.
You might think that we would be opposed to this idea, as we firmly believe in fairness and equality, but given that so many will benefit from this, and given that this threat can so easily be sidestepped by those who its gun points at, we should perhaps even applaud it.
This Plan Is Amusingly Fabulous
If it were just a matter of seeing some people give up their money to others while being held up by Joe Biden, this would be no more fair than if Joe held them up with a real gun rather than by way of the power of law. Joe’s gun isn’t actually loaded though, and that’s the rub.
All you have to do in order to avoid getting your pocket picked if this happens is to just not contribute any more to your traditional retirement accounts. It’s not even that people will miss this, as you’d have to be sick in the head to put any more money in these accounts under such a scheme, and you would put it into a Roth account instead, which avoids Joe’s machinations completely.
There’s really not a whole lot of difference between traditional and Roth accounts anyway, but the more money you have, the less difference there is, due to lesser tax savings overall percentage wise. In some cases, a traditional account is a little better, but the difference is small in all cases, and there are good arguments for higher earners to favor a Roth as well.
In any case, a Roth account is a fine place to enjoy saving tax while saving for retirement, and this is the account so many well-off people wish that they had later in life, when they have to wrestle with things like minimum required distributions.
We’re not sure if Biden had thought of this, although it’s very unlikely. He also amusingly threatened a tax on corporate dividends, obviously not realizing that corporations can then just suspend dividends, and this would just serve to help some stocks since dividends hurt stock performance and overall returns.
Since this is just a slap of his that missed, there really isn’t anything of significance to dull our excitement for those who are in the lower tax brackets. If you can contribute to your retirement account and enjoy all the normal benefits of that, plus get a free gift, 11% of your contribution right in your pocket, that’s a sweet deal.
So many folks whose income is on the lower end of retirement account savers are a long way from achieving their retirement goals, and getting a kickback from Uncle Joe sure could help, provided that they contribute this extra money and not just spend it.
Even if they do just spend it, they’ll at least be made happier, and stimulate the economy as well, with whatever they spend this money on. Perhaps this stimulus money from the IRS will stimulate them to save more, a task that retirement accounts have had limited success with thus far, and they can enjoy the benefits of both saving more and spending more.
There’s nothing like getting your palms greased to get you off your feet. As far as the economic ramifications of this, tax breaks are actually good things, great for the people and great for the economy. Everyone actually wins, even the dodging fatter cats, who get to see their investments rise from this stimulus.
We actually know that Biden didn’t foresee any of this, because he is claiming that this plan will be revenue neutral. He seems have gone one up on the legendary Mr. Hood, to give to the poor while only pretending to steal from the rich but not actually doing it. The poorer will surely be grateful, and no one was really harmed. This shows us that foolish ideas and foolish mistakes can combine as a double negative, which is a positive, and we sure saw this all come together this time.