U.S. Elections: Impact on Retirement Planning

If there’s one theme to many of Biden’s investment and financial planning policies, it’s this: more emphasis on ‘regular’ middle-class Americans. To that end, the Biden Administration can be seen as reversing some of President Trump’s policies on a key number of points. For example, several of Biden’s policy points include new regulation targeting the selling of financial products to consumers. Expanding on topics like Regulation B, Biden is set to add additional disclosures and marketing rules to ensure Americans aren’t getting fleeced by Wall Street.

In addition, many of Biden’s retirement planning policies revolve around shifting the playbook from higher income/savers to those earning less income/having difficulties saving for retirement. Boosts to Social Security, new 401k rules, and savings plans were expected to be touted, as will new takes on both corporate taxes and investment taxes. This could impact dividend investors as well as high-net-worth individuals.

In the end, Biden’s focus could seem like a reset of many of the Trump Administration’s policies.

Be sure to check the Retirement Channel to know more about retirement planning concepts.

One of the starkest contrasts to Biden’s financial plans happens to be changes to retirement savings. Much of that comes down to tax credits. Right now, savers can contribute up to $19,500 in a defined contribution plan such as a 401K. Savers can deduct the amount saved from their taxable income. The argument is these favor people in higher income brackets. Not only can they save more, but they are also able to bypass more in taxes.

Biden’s plan reimagines this tax deduction as a flat refundable tax credit.

This means that anyone — regardless of the amount saved — would receive the same deduction percentage. While the Biden Campaign hasn’t officially put an amount on the credit, The Tax Policy Center predicts the amount would equal around 26% of an individual’s retirement contribution. This means a household earning about $80,000 per year would see the maximum deduction amount. Those above that income and saving more would see the value of their contributions reduced. For example, someone earning $600,000 would get the same tax break as someone making just $60,000. The idea is that those in higher brackets would still be ‘on the hook’ for more taxes.

Secondly, Biden is looking to make retirement savings mandatory and automatic. Right now, the number of workers without a 401k or pension plan is rising significantly and there is a major retirement crisis. Biden is looking to establish plans for these workers lost in the shuffle. While several of these plans had existed before — such as MyIRA — they have been closed. Biden would re-establish these plans and expand them to include more workers.

Another key piece of Biden’s financial plan comes down to the so-called ‘third stool-leg’ of retirement savings: Social Security.

The Trump Administration had looked to address shortfalls in the program by cutting benefits. Biden is actually looking to do the opposite. The President-elect is looking to expand Social Security and is seeking to impose significant taxes to pay for those additional benefits.

Currently, Americans pay Social Security taxes on their first $137,700 in wages on their payroll. Above that range, higher income earners stop paying additional payroll taxes as benefits no longer accrue above those thresholds. Biden’s proposal would institute a 12.4% payroll tax for Social Security on incomes above a certain level, initially projected to be $250,000. Biden’s plan is aimed to generate enough money to fix the gaps in the program, expand Social Security to more individuals, and increase minimum payments to low-wage workers.

Biden is also looking to eliminate some provisions for government workers and the receiving of Social Security. Several states and federal employees are not subject to payroll taxation for the program, but in return receive reduced benefits when hitting retirement age.

Finally, Biden is taking aim at taxes on two fronts and looking to overhaul the Tax Cuts & Jobs Act.

For starters, Biden is looking to change the capital gains tax rate back to 39.6% for people who make more than $1 million. The Republican tax cuts set that rate down to 20% along with a 3.8% tax for net investment income. Biden has also proposed a transaction tax to eliminate short-term trading and many of the step-up basis rules for inherited stock. This could be a major game changer for high-net-worth individuals and inheritances.

Biden also wants to raise the corporate income tax rate to 28% from the current 21% implemented during the Tax Cut & Jobs Act. Biden has proposed a new minimum tax of 15% on reported profits. This is even if deductions and credits push taxable profits down to zero. This is the reason why a firm like Amazon can make money and pay nothing in federal taxes. These rules could be pretty substantial when it comes to dividend income and buyback potential as companies may have less money to return to shareholders.

With President-elect Biden comes a host of new policy changes that advisors and investors will have to look out for. In the end, many tax deduction changes may present a new way of thinking when it comes to saving for retirement. We’ll need to balance our approaches differently if any of these motions come to pass.

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