The Biden tax plan may increase Roth retirement accounts

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Biden tax plan

In general, Roth accounts are useful if taxpayers believe their income tax rate will be higher when they withdraw money in retirement.

In this case, there would be a financial advantage in paying the tax at a lower rate now.

Biden’s tax plan could make Roth accounts more attractive, especially for wealthy households.

The Biden government has announced its intention to collect taxes on individuals whose income exceeds $ 400,000 per year to help fund their legislative agenda.

The White House has not officially proposed an increase in the individual tax book. The administration recently proposed a corporate tax increase to fund an infrastructure project.

However, Biden is expected to propose raising the highest income tax rate from the current 37% to 39.6%. This would bring the maximum rate back to its level before the 2017 Tax Cuts and Jobs Act.

“I think we almost know, or by the end of the year we will know [top] The rate will increase from 37% to 39.6%, “said Robert Keebler, auditor based in Green Bay, Wisconsin.

Inheritance tax

The White House is also likely to require lower inheritance tax exemptions, making wealthier goods subject to the tax upon death.

Currently, a 40% estate tax applies to estate assets in excess of $ 11.7 million (or $ 23.4 million for a married couple).

Biden has proposed lowering that threshold to $ 3.5 million in rebates on death. Senator Bernie Sanders, I-Vt., Proposed 45% taxing properties over $ 3.5 million and increasing it to 65% for those over $ 1 billion.

This is important in the context of retirement planning. A Roth conversion reduces the size of an estate by the amount of income tax paid on that conversion.

Wealthy individuals can therefore use a Roth Account to reduce the size of their taxable estate and potentially avoid federal estate tax, LaBrecque said. A similar concept applies in states that levy inheritance tax.

Not just the rich

But Roth accounts can’t just benefit the super-rich.

As a presidential candidate, Biden proposed changing the tax treatment of savings in traditional 401 (k) pre-tax, individual retirement accounts, and other retirement accounts.

Savers currently receive a tax deduction that increases for those in higher brackets. For example, someone in the 12% class would deduct $ 12 from their taxable income for every $ 100 of savings. Someone in the 37% tax bracket would receive a $ 37 benefit.

Biden’s plan would instead create a tax credit for pension contributions, which, according to the tax foundation, means a deduction of 20.5% for all taxpayers regardless of income.

If [larger conversions] In 37% they make sense, in 39.6% they make more sense.

Robert Keebler


This structure would benefit low paid workers. (For example, a taxpayer in the 12% tax bracket would receive a 20.5% deduction.)

The highest earners would now receive a 20.5% tax deduction on their pre-tax savings, but would later pay taxes at a higher rate of 37%.

These dynamics mean that earners in the tax bracket of 22% or higher would likely be affected. This would include single taxpayers with an annual income of at least $ 40,500 and married couples earning over $ 81,000.

This reduced tax break could make Roth accounts more attractive, Keebler said.


However, a 401 (k) before tax can help with other suggestions, such as one to increase social security tax for those earning more than $ 400,000.

Someone crossing this threshold can potentially avoid the payroll tax hike by using savings in a 401 (k) pre-tax to bring their taxable income below $ 400,000.

In addition to Biden’s tax plan, Roth accounts can be beneficial for other reasons.

For example, they do not come with the minimum distributions required. New rules also mean that people who inherit retirement accounts must withdraw assets within 10 years. Heirs to traditional accounts would have to pay tax on these withdrawals.

There are reservations for those looking to convert a traditional account to a Roth. For one, they need the cash on hand to pay the associated tax on the conversion.

It may also make sense for those doing conversions of modest amounts to wait until the end of 2021, when the tax law changes are a little clearer, Keebler said. At this point, these are just suggestions that may not become law.

Larger conversions are best done gradually over the course of the year – possibly between April, July, October and the end of the year, Keebler said.

“If larger conversions make sense at 37%, they make more sense at 39.6%,” he said.

Taxpayers should also be aware that a Roth conversion will increase their taxable income and potentially push them into a higher tax bracket.

There are also income limits on Roth IRA contributions. Taxpayers are not allowed to contribute if their modified adjusted gross income exceeds $ 140,000 that year. (For married joint tax advisors, it’s $ 208,000.)

Income limits do not apply to a Roth conversion or 401 (k).