Biden's Retirement Plan

President-elect Joe Biden has announced several proposals on how the tax treatment of retirement savings might change in the coming years. Biden’s retirement proposal includes eliminating the current pre-tax treatment of traditional retirement plan contributions. Under current law, taxpayers are entitled to contribute up to $19,500 in pre-tax dollars to a 401(k). Under Biden’s plan, taxpayers would be entitled to a 26% “matching” contribution. The 26% match would apply across the board, regardless of the taxpayer’s ordinary income tax bracket.

We asked two professors and authors of ALM’s Tax Facts with opposing political viewpoints to share their opinions on Biden’s plan to shift the tax treatment of 401(k) contributions.

Below is a summary of the debate that ensued between the two professors.

Their Votes:

Bloink

Byrnes

Their Reasons:

Bloink: Lower and middle income taxpayers are facing an impending retirement savings crisis. The fact is, lower income taxpayers are simply unable to save at a rate that would produce a secure income source during retirement. We have to make some type of change to provide a stronger savings incentive for taxpayers at a high risk of living in poverty during retirement. This change does just that by greatly encouraging low and middle income taxpayers to save for retirement.

Byrnes: This is a hidden tax on the wealthy. Rather than positioning the 26% match as a floor, it's an across-the-board rule. Taxpayers in higher tax brackets would have a distinct disadvantage to save for retirement under this plan. It doesn’t make sense that we would want to discourage anyone from saving for retirement.

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Bloink: Currently, a pre-tax contribution simply reduces the taxpayer's taxable income. For those in lower income tax brackets, it's often an insufficient incentive to encourage saving. Taxpayers would, for example, receive a $2,600 matching contribution based on a $10,000 contribution. For taxpayers in lower tax brackets, this represents a much more substantial benefit than a simple reduction in taxable income--especially if the taxpayer isn't paying much based on lower income in the first place.

Byrnes: This rule is telling single people who earn more than around $163,000 (the start of the 32% bracket) that their retirement contributions aren't providing the same type of tax value that they have for years. This makes zero sense and completely goes against Biden’s repeated promises to avoid any tax increases on taxpayers who earn less than $400,000 per year.

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Bloink: We have to choose are battles. The wealthy are able to max out their pre-tax retirement contributions and take advantage of a myriad of other savings options. These aren’t the taxpayers whose retirement security we have to worry about. These aren’t the taxpayers who will actually rely upon Social Security during retirement. It makes perfect sense that the system should be designed to provide a stronger benefit for those who have fewer retirement savings options.

Byrnes: In addition to the basic savings disincentive, this is an extremely complex proposal from an administrative standpoint--it'll never pass. We should be taking steps to make the tax code more simple, not so unreasonably complex that ordinary Americans can’t even understand the way their retirement savings will be taxed.