The Biden Administration is currently looking at making changes to the tax incentives of saving for retirement. Treasury Secretary Janet Yellen recently announced the Administration is considering a proposal to replace the dollar-for-dollar tax deduction with a 26% credit. More details can be found here.
What does this mean for you? If you expect to pay tax at a marginal rate higher than 26% (taxable income over $329,850 for married taxpayers and $164,925 for single taxpayers), then you could see the tax value of your retirement plan contribution diminish.
How? Under current rules, a tax deduction offsets your highest taxed income first. If you pay tax at the highest federal rate, then deferrals into your retirement plan can save up to $7,215 in federal tax, even more once you reach age 50. If the benefit on your retirement plan contribution is limited to 26%, then your tax benefit is capped at $5,070. Self-employed individuals and partners in partnerships could take an even greater hit.
Stay tuned. A change in these rules could nudge more taxpayers to consider Roth and other options to traditional retirement savings.
As always please contact us if you have questions or need assistance.