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An aggressive political battle over the shape of your retirement is beginning in Washington D.C.
Here is a brief outline of possible changes in policy that, if enacted, would impact your retirement security.
President Biden has proposed eliminating the step-up in basis for inherited capital assets, therefore, heirs face substantially higher taxes on their wealth in the future.
Capital gains tax rates could potentially be raised for those making over $1 million, and the federal estate tax exemption could be reduced from the current level, $11.5 million. One possibility is an exemption roll back to its 2017 level of $5.49 million.
There are plans to create tax credits for small businesses that widen access to 401(k) plans for those workers saving for retirement. This includes a proposal to mandate auto-enrollment. This is not a bad idea because studies show this considerably enhances savings.
However, a more controversial plan is brewing to “equalize” the tax benefits of individual 401(k) contributions. This means substituting the current system of an individual making a contribution then deducting this amount from their income to a universal tax credit of $260 for any size contribution. Sponsors of this proposal feel that higher income workers have an unfair advantage and a universal tax credit will incentivize lower wage earners. This thesis remains inconclusive.
Several tax changes are in the pipeline to help senior citizens and caregivers. Seniors who qualify can obtain tax benefits for paying their long-term care insurance with retirement savings. In addition, low-wage workers over 65 years old are being considered for access to an earned income credit which does no currently apply to them. Expect a drive to add a new $5,000 tax credit for “informal” or family caregivers providing unpaid long-term care to elderly relatives.
Social Security “adjustments” are back on the table. Many of these policy proposals were first pushed in the Democratic primary. New beneficiaries who spent at least 30 years working could receive a new annual minimum Social Security payment of $15,950. Increased benefits would also favor teachers, public-sector workers, and surviving spouses. In order to pay for these added benefits, expect a contentious debateon increasing the payroll tax cap above $400,000.
While annual income above $142,800 is currently not subject to payroll tax, the new administration will circle back to target wages above $400,000 for the 12.4% levy which may also see an increase in the years ahead. This new income level of $400,000 will not be indexed for inflation.
Democrats have consistently supported financial transaction taxes on every aspect of security activity. This proposal fails to note that retirement plans are major purchasers and sellers of stocks and bonds so 401(k) and IRA participants would face higher expenses if subject to this tax.
Finally, Biden has previously floated a remedy to help workers in their 60s from losing jobs and health care. He may propose lowering the Medicare eligibility age from 65 to 60. This adjustment would be meant to help older employees who lost their jobs during the COVID pandemic.
The debate on these retirement related issues will heat up in the next few weeks and months. It will be important to remain vigilant and well informed because as our population grows older, these issues are not going away.