In October 2020, then-President Donald Trump tweeted that American’s 401(k)s “will crash” under then-presidential candidate Joe Biden and that Biden’s tax and regulation increases “will destroy all you have built.” But Biden doesn’t want to tax 401(k) accounts; he wants to replace the tax deductions with tax credits.
“Current tax benefits for retirement savings provide upper-income families with a significant tax break, while providing a limited benefit for low- and middle-income workers,” President Biden’s campaign website explains. Here are more facts about Biden’s proposed 401(k) tax benefit changes.
Myth: Biden wants to tax 401(k) accounts
In November 2020, The Associated Press debunked recent social media posts claiming Biden said he would tax 401(k) accounts. “Biden slipped up and came out saying he’s going to tax your 401k,” one such post read. “Are any of you even paying attention?”
But Biden hadn’t said anything of the sort, according to experts: He had proposed giving taxpayers tax credits rather than deductions if they contributed to 401(k) accounts.
“It’s inaccurate to say he’s going to tax your retirement plans,” Jason Oh, a professor specializing in tax law at University of California, Los Angeles School of Law, told The Associated Press. He added that the proposed tax credit would make 401(k) tax benefits more equitable than the current tax deductions, which tend to benefit higher-income Americans more.
Heather Field, a tax law professor at University of California, Hastings College of Law, told the wire service that Biden’s proposed tax credit would “likely increase the tax benefit that low- and middle-income taxpayers get from future retirement savings.”
And though Field said the tax credit would mean that “a high-income taxpayer might get a smaller benefit from future retirement savings than they do under current law,” the change “would not be properly characterized as ‘taxing your 401(k)’ because taxpayers would still be getting tax benefits for investing in retirement accounts; it is just that the mechanism for determining the amount of any taxpayer’s tax benefit would be changed,” she explained.
How would the 401(k) tax credit work?
With the current deduction, a taxpayer who earns $70,000 per year (and thus falls under the 12 percent tax rate) would get a tax savings of $1,200 on a $10,000 401(k) contribution, while a taxpayer who earns $450,000 per year (and thus falls under the 35 percent tax rate) would get a tax savings of $3,500 on the same $10,000 contribution, as U.S. News & World Report points out.
The statement on Biden’s campaign website says the president “will equalize benefits across the income scale, so working families also receive substantial tax benefits when they put money away for retirement.”
In an interview with U.S. News, Bryan Bibbo, lead advisor at the JL Smith Group in Avon, Ohio, explains how the tax benefits would be equalized: “Biden is proposing making it an equal tax break no matter what your income level is. The proposed tax credit is 26 percent, whether you are at $70,000 or $450,000.”