Biden’s Expected Capital Gains Changes Won’t Impact 401(k) Accounts

How does Biden’s tax plan impact 401(k) accounts? For starters, the proposed capital gains tax increase wouldn’t affect retirement savings.

Dan Clarendon - Author

May 10 2021, Published 2:54 p.m. ET

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There has been a lot of chatter about President Joe Biden's tax plan and its impact on retirement accounts, including then-President Donald Trump’s October 2020 tweet that Americans’ 401(k) plans would “crash” under a Biden administration.

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As Market Realist previously reported, Biden isn’t interested in taxing 401(k) accounts. Instead, he wants to replace tax deductions with tax credits for those retirement savings.

Now, experts have more good news for folks with 401(k) accounts. The accounts won’t be impacted by Biden’s proposed capital gains tax increases.

Most U.S. investors have stock in accounts not subject to capital gains tax, 401(k)s included.

According to Bloomberg, Biden is expected to propose raising the capital gains tax (on assets held in taxable accounts for more than a year) from 20 percent to 39.6 percent for those taxpayers who earn more than $1 million in income. (With the 3.8-percent surtax on net investment income, which the Affordable Care Act authorized to fund Medicare expansion, the rate becomes 43.4 percent.)

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President Joe Biden

Recent UBS research revealed that 75 percent of U.S. stock investors wouldn't be affected by the proposed tax rate increase because they own stock in accounts that aren't subject to captain gains tax in the first place, according to CNBC. Those accounts include 401(k) accounts and individual retirement accounts (IRAs).

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“If the average American owns stock, stock mutual funds or exchange-traded funds in a qualified [retirement] plan, it doesn’t have any impact,” Paul Auslander, director of financial planning at ProVise Management Group, explained to CNBC.

The other 25 percent have stock in taxable brokerage accounts, UBS reported, and those accounts are subject to capital gains tax. However, the proposed tax rate increase wouldn’t even impact all of those taxpayers because of the aforementioned $1 million income threshold.

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CNBC cited IRS data that showed that around 540,000 U.S. taxpayers had incomes above $1 million in 2018, comprising 0.3 percent of the 154 million people who filed tax returns that year. “If you’re not making $1 million a year you don’t have to worry about this extra tax,” Auslander added.

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Some people are switching from a traditional 401(k) to a Roth 401(k).

The Biden administration is also expected to propose raising the top income tax rate—the tax rate for those earning more than $400,000 a year—from 37 percent to 39.6 percent. That 39.6 percent rate matches the proposed capital gains tax, and it was also the tax rate that applied to top earners before the 2017 Tax Cuts and Jobs Act.

The prospect of that income tax rate increase has some taxpayers thinking about moving their retirement savings from conventional 401(k)s and IRAs to Roth 401(k)s and IRAs. That way, they’d pay taxes on the savings now instead of later, when the tax rate might be higher.

“Roths have all of a sudden become a better flavor than they were before,” Leon LaBrecque, an accountant and certified financial planner at Sequoia Financial Group, told CNBC. “We’re on a full-board tilt trying to get everyone converting [to a Roth account] that we can.”

There are caveats, though, as the site reports. There’s an associated tax on Roth conversions, for example, and Roth conversions could increase taxpayers’ taxable income.


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