(09-14-2020 05:39 PM)chess Wrote: (09-14-2020 12:58 PM)Captain Bearcat Wrote: Right now 401ks really don't offer any incentives for the people who need 401ks the most. This changes that.
Can you explain what you are meaning by this statement?
With a traditional 401k, a person's income is reduced dollar for dollar to what a person directs to the retirement account. This is an incentive.
Under the current law, right now I am taxed on 80% of my salary with the last dollars of those 80% being taxed at a 12% marginal rate:
$0 - $12,400 at 0% = $0 (standard deduction)
$12,401 - $22,275 at 10% = $987.50
$22,275 - $46,000 at 12% = $2,847.00
$46,001 - $57,500 at 0% (retirement contribution)
Total tax = $3,474.50
Under Biden's plan, I would be taxed on 100% of my salary with the last dollars in the 22% tax bracket, but I would get a credit of 26% of the 20% I contribute:
$0 - $12,400 at 0% = $0 (standard deduction)
$12,401 - $22,275 at 10% = $987.50
$22,275 - $52,525 at 12% = $3,630.00
$52,526 - $57,500 at 22% = $1,094.50
Total tax = $5,712.00
Tax credit for retirement contribution: ($2,990.00)
Net tax = $2,722.00
I would expect the states with income taxes to keep doing it the current way, although Kentucky might be an exception given it has one individual income tax rate.
Contributions to a 401(k) are limited, so my main concern is this won't be revenue neutral, but may actually cut tax revenue. If you're making $500,000 or more, you're probably not worried too much about 11% on the $19,000 maximum you're putting in a 401(k), especially since an employer can put in nearly twice that amount.