There is a lot of talk by politicians about equality and giving the average American an opportunity to save. Presidential candidate Joe Biden is proposing a change to the current 401k plans. He argues that the way the current plan is structured it favors the wealthy. It needs to be changed so that it can benefit the poor and the middle class.
It makes sense. There are many in our country who are struggling and trying to make it. Will this change in policy work? I don’t know. As much as I want to be optimistic, I have to be also realistic. There are many who just really don’t like to work and want everything for free. You who is here reading this blog I am sure is not one of these people. Why? The fact that you are here getting more knowledge about how to improve your finances and how to get to financial independence tells me you want to improve your chances of building a nice net worth. Like I wrote on this article, it is all about Net Worth.
You can give a check for $1,000,000 to an irresponsible person and watch in pain or humor how that money is burned within a year. Nothing invested, nothing saved. That person will be the first to buy a $100,000 car (there goes 10%) and then another $50,000 on a boat (there goes 5%) and so on until there is nothing left. Think of the famous basketball or football players who end up with nothing after they complete their career as a professional athlete.
But enough about that. Let’s see how this change that Joe Biden is talking about will have an impact on me and you now. You can read my post on Retirement Accounts and 401ks.
Current Tax Benefits
The current tax benefits if you put money away in your retirement account has the following benefits:
- Tax deduction from your income
- Money for taxes to the government is put to work for you
- You pay less in taxes now
- Pay taxes on retirement contributions alter when you take the money out
Here is the maximum you can put away in 401(k) plans for 2020 and 2019.
As you can see you can put a nice amount of your salary into your retirement account. Everything counts. It helps to save and to get a tax deduction too. Savers like you and me are the ones that take advantage of these accounts.
Here are the numbers for IRAs, SIMPLE Plans and SEPs.
As you can see you can put some good funds to work for you while you wait to retire. All these accounts have restrictions. The whole incentive here is to put money away and not touch it until you are 591/2 years old. Let us just say 60 years old. If you do, you will have a 10% penalty from the government. Plus the taxes that you have not paid because remember, that money is working for you since it was a tax deduction when you made the contribution.
Proposed Changes
The Democrats think that the current setup is not fair to people who earn low incomes. They want to level the playing field by hurting the high earners and savers to force the low earners and spenders to save. For me, it makes no sense. Because like I said at the beginning of this post, you can give a check for $1,000,000 to a fool and he will not know what to do with it and spend it on silly items.
The argument is that a person earning $600,000 a year who is at the 37% tax bracket and they make a contribution to their 401(k) of $1,000, then they get a savings or tax deduction of $370. Simple math right, 37%. Whereas a person earning $60,000 a year makes a $1,000 contribution to the 401(k) then the savings or deduction is only $220 because they are at the 22% tax bracket.
What they are proposing is make the same deduction percentage to all. Those who earn $600,000 and $60,000 will get the same 22% deduction. So that it is the same $220 regardless of income.
Here is a sample of how the change would impact a high earner.
You can see that there is a difference of $3,000 in tax deductions for a high earner.
I don’t know if this is the solution to try to help those who earn less income to save. I have seen for years how people who have bad habits and are just poor at personal financial management never save. They always find excuses to spend the money.
The high earners and the savers have a nice net worth because of the sacrifice. They skip a vacation, a dinner or any fun activities to save.
It is a good idea but it is probably not going to change anything. The wealthy and high earners always find ways to put money away and still get some sort of tax benefit. I am thinking the Roth IRAs that allow one to put money away with after-tax dollars. Then, when you take the money out at age 591/2 you do not have to pay one cent in taxes. Of course, there are limits as to how much money you can put away.
Wealthy people will just move away from 401(k)s and not save. Hurting the economy more and the saving percentage rate in our country.
But for us Economy Chiefs, we win either way. If Joe Biden wins, I will put more money in real estate and move away from retirement accounts. Since there are more benefits in real estate with depreciation and expense deductions. Let’s not forget the 1031. You can sell an investment property and invest the proceeds in another real estate investment property. Deferring taxes as much as possible.
It will be interesting to see what happens on November 3rd 2020. Life for me will not change. I will continue to invest and will continue to save to get to my goal of $10,000,000 net worth in ten years. Regardless if a Democrat or a Republican is at the White House, my goals don’t change and neither do my motivation to save and my financial habits.
My two kids will still need to go to college. I will still have my goal to buy a third bigger and more expensive home and rent the second one. Have two rented properties generating passive income. I am sure 2021 will have some great real estate opportunities. But I will write about that on another blog post.
Sincerely,
The Economy Chief
What to read a brief bio of the Economy Chief? Sure. Click Here – Economy Chief bio.