U.S. President Joe Biden has announced his plans for higher taxes that would help add Roth retirement accounts, raising some concern amongst some of the wealthiest American households. Experts suggest that saving in a Roth account could be a benefit from these plans, allowing people to pay taxes on the savings upfront – ahead of the retirement days.
Biden’s tax plan
President Biden had spoken about his plans about higher taxes during his presidential campaign. In short, Biden’s plan is to increase taxes for those households with an income is of $400,000 or higher. High earning corporations will also be subject to a new minimum tax on book income. The President is looking to close the income gap by raising the highest personal income rate back up to 39.6%, after it was lowered to 37% in the 2017 tax reform law. White House press secretary Jen Psaki said, “The President remains committed to his pledge from the campaign that nobody making under $400,000 a year will have their taxes increased.”
The reason behind Biden’s increase in taxes is to ensure fairness – with high earners paying their share. Director of economic policy at the Bipartisan Policy Center, Shai Akabas noted, “He did draw a pretty clear line during the campaign. I expect, at least in his initial proposal, he’ll stick to that.” It’s important to keep in mind that the $400,000 income cap will be set for households, and not individuals. In addition, itemised deductions are to be capped to 28% for those high-earning households. Will the changes go through? It’s still too early to say, as there are still several Republicans in the Senate who will block most of Biden’s tax policies. Moreover, Biden will also be handling the coronavirus pandemic, being a more urgent matter, so the tax changes won’t be affected any time soon.
The Trump Tax Reform Plan
During his time at the White House, Donald Trump performed the largest overhaul in the last 30 years, making changes to the tax code. On December 22nd, 2017, Trump signed the Tax Cuts and Jobs Act (TCJA) into law, creating a single corporate tax rate of 21%. The corporate rate was lowered to 21%, boosting financial services companies whilst some banks also saw their effective tax rate fall to below 21%. The full bill is around 200 pages long and affects taxes in the short term. Its changes and affects will only be run and active until 2025.
Roth retirement plans
Roth IRA are special retirement accounts where taxes are paid on money going into your account, as opposed to withdrawals. Therefore, future withdrawal will not be taxed. Roth IRA can be funded by regular contributions, spousal IRA contributions, transfers, rollover contributions or conversions. Hence, Biden’s tax plans may attract more people to Roth accounts as the income-tax rate is higher that when the money is withdrawn in retirement. Biden’s plans have not been set in motion yet but are expected. certified public accountant based in Green Bay, Wisconsin, Robert Keebler said, “I think we kind of almost know, or by end of the year we’ll know, the [top] rate will jump from 37% to 39.6%.” A lower estate-tax exemption is also expected to be called for by the Biden administration. The President is set to eliminate the step-up in basis, leaving the heir to sell the asset without paying tax. Attorney at Kleinberg, Kaplan, Wolff & Cohen, Bruce Steiner also noted that Biden’s campaign had also highlighted the reduction of the amount able to be transferred without paying estate and gift taxes, to $3.5 million. Lifetime gifts will also be lowered to $1 million. However, a Roth account could come in handy as it reduces the size of the taxable estate, which could lead to avoiding the federal estate tax.
Such Roth retirement plans do not only benefit the wealthy, despite Biden’s new tax plans are directed to the high earners. During his presidential campaign, Biden vouched to change the tax treatment of savings individual retirement accounts. The Tax Foundation conveyed that Biden’s plans would “eliminate deductible traditional contributions” and give a 26% refundable tax credit for each $1 contributed. As a result, low earners will also benefit from Roth plans. Keebler insists that Biden’s changes will make Roth retirement plans a far more attractive option.