Throughout the campaign, Joe Biden has talked about the critical need to rebuild a stronger middle class, including ensuring that people have “a steady, secure income as you age so your kids won’t have to take care of you in retirement.” Keep reading to learn more about how Joe Biden’s Presidency could affect your 401(k) and your retirement security.
While headlines laud the record-high number of 401(k) millionaires, the average 401(k) balance is $106,000. Dividing that over a retirement that could last 20 years, you’d end up with just $5,300 per year—certainly not enough to provide an adequate income in retirement years.
Here are three changes that Joe Biden’s campaign could propose and how those affect your retirement security:
1. Changing how traditional retirement accounts are taxed
By modifying the tax code, Biden has proposed changing the tax perks that come with 401(k)s, individual retirement accounts (IRAs), and SIMPLE IRA accounts.
What would change? Today, millions of people receive tax deductions for contributing to “traditional” retirement accounts that are taxed upon withdrawal in retirement. Biden’s proposal would replace those deductions with a 26% flat-rate tax credit on every $1 contributed. Based on your contribution, the tax credit would be calculated and then deposited into your retirement account as a matching contribution.
Why is this change being proposed? The goal is to make tax advantages more equitable to people, regardless of their income. Right now, while everyone is eligible for tax advantages for saving in a 401(k) (or another similar account), the relative value of that tax perk varies depending on your economic situation:
Let’s compare what this looks like today if you make $40,000 per year vs. $100,000 per year and you get tax deductions for 401(k) contributions:
| Income | Contribution (% of pay) | Contribution ($) | Tax bracket | Tax savings |
|---|---|---|---|---|
| $40,000 | 10% | $4,000 | 12% | $480 |
| $100,000 | 10% | $10,000 | 24% | $2,400 |
In this case, the person making $40,000 receives a tax benefit that’s one-fifth that of the person making $100,000.
Here’s what that would look like with a flat-rate tax-credit of 26% proposed under Joe Biden’s administration:
| Income | Contribution (% of pay) | Contribution ($) | Tax bracket | Tax savings |
|---|---|---|---|---|
| $40,000 | 10% | $4,000 | 26% | $1,040 |
| $100,000 | 10% | $10,000 | 26% | $2,600 |
In this case, the person making $40,000 receives a much larger tax benefit — more than twice as high as they would under the tax deduction.
What does this mean for retirement savers? Lower-income earners may be more likely to save for retirement, in order to take advantage of the higher tax incentives. Earners with a higher income might be more inclined to save in Roth accounts, including a Roth 401(k) or Roth IRA.
Read more about how to choose between a Roth 401(k) vs. a traditional 401(k)
2. Creating a path for caregivers to save for retirement
On the campaign trail, Joe Biden shared reflections about his family’s journey through multiple chapters of caregiving: looking after young children as a single parent, caring for a terminally ill adult son, and tending to aging parents. Millions of American families experience this every year and, because it can take workers out of the workforce, it means it has significant financial consequences on retirement security.
Today, anyone who steps out of the paid workforce to become a full-time caregiver for a spouse, parent, or other family member misses out on tax incentives for retirement savings. In response, Biden wants to give caregivers a break (based on legislation proposed by Jackie Walorski, R-Indiana, and Harley Rouda, D-California).
What would change? On top of a $5,000 tax credit for family caregivers, Biden has proposed allowing every caregiver who has taken a year (or more) out of the workforce to be eligible to make additional contributions to their retirement accounts. That is, expanding the catch-up contributions that typically kick in at age 50. For example:
-A 401(k): Today, only when you reach age 50, can you sock away an additional $7,500 on top of the $23,000 annual contribution limit, for a total of $30,500. Biden is proposing to allow caregivers, regardless of age to be eligible to contribute $30,500.
-An IRA: Retirement savers age 50 and older can contribute $7,500 whereas those under 50 can only contribute $6,500. Biden is proposing that caregivers, regardless of age, would be able to contribute $7,500 in 2024) to caregivers regardless of age.
Why is this change being proposed? Just like GDP fails to account for the value of the care economy, Social Security currently doesn’t give much credit for caregiving. If you take time out of the workforce to look after someone, as many of America’s 41 million caregivers do, there’s a ripple of financial effects:
Missing employment income during the time you’re caregiving,
Missing tax benefits on 401(k) contributions as well as any investment earnings that those contributions would have accrued, and
Because Social Security determines your monthly benefit based on your earnings during your highest-earning 35 years of employment. A year during which you earn $0 could reduce the monthly benefit that you’ll receive from when you first claim through the rest of your life.
What does this mean for retirement savers? Today, 28 percent of caregivers say they stop saving because of caregiving. The adjustments that Biden proposes to make for caregivers could help keep many of them on-track with saving and ensuring their financial security for the future.
3. Expanding access to work-based retirement savings plans
A long-standing challenge to retirement savings has been the many employees that don’t have access to a way to save for retirement through work.
What would change? Biden has, in the past, proposed the implementation of an “automatic 401(k),” ensuring that people have access to retirement savings tools regardless of where they work. A 2007 article suggests that people would be able to opt out if they do not wish to participate in a company’s plan but the default would be to sign them up.
Why is this change being proposed? Today, nearly half of small business employees (47%) do not have access to a way to save for retirement through work. That means, they’re jeopardizing their future retirement security and also missing out on significant tax advantages. When people are automatically enrolled in retirement savings plans, they save more.
What does this mean for retirement savers? If retirement plans are universally adopted (or required) at all workplaces, millions of workers could gain access to a way to save for retirement at work.
*Traditional 401(k)s, IRAs, etc., operate using pre-tax contributions and then are taxed upon withdrawal in retirement. These differ from Roth 401(k)s and Roth IRAs, which are taxed today but allow withdrawals to be taken out tax-free at retirement. Biden’s proposal does not affect Roth-style retirement accounts.
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The Human Interest TeamWe believe that everyone deserves access to a secure financial future, which is why we make it easy to provide a 401(k) to your employees. Human Interest offers a low-cost 401(k) with automated administration, built-in investment education, and integration with leading payroll providers.
