Joe Biden's Plans for Your 401K Explained With Examples! 📈 (Biden's 401K Plans) 26% 💰

president biden is talking about making changes to the 401k in terms of how your contributions will affect your taxes but what does it mean for you that's what we're going to discuss in this video now i don't know about you guys but every time a politician talks about making changes to a retirement plan my chest starts to tighten a little bit you know what i mean i get those chest palpitations going grab your cup of coffee or whatever your beverage of choice is including alcohol if you want and let's discuss this my name is mike the cpa and welcome to money and life tv if you're checking out the channel for the first time we produce videos around finances investing in taxes to help people like yourself build wealth to support my work and to help others see this video over youtube if you can drop a like i would really appreciate it or even consider subscribing to the channel for more weekly content around these various topics after doing several hours of research on this topic you know this was something i was really interested in as somebody who prepares taxes for a living and someone who thoroughly enjoys investing i wanted to know what was going on now this is just proposed and when i say propose i really mean just proposed however if this eventually comes to light well then i wanted to know like how is it going to affect us i mean do we still contribute to our 401k does it still make sense you know what's what's going what's he want here what's he trying to do well after digging into it a little further i found that the ultimate goal of this is really just to help one is to raise taxes which we're going to talk about in a second but also to help equalize the contributions of lower income individuals to give them a greater benefit when they contribute to their 401k in a nutshell those are the two things i think he's trying to accomplish right now the way the 401k works at just a traditional 401k is if you're somebody who's in a high income bracket let's say you're at the highest tax rate of 37 percent when you contribute money to your 401k it's like getting a 37 tax reduction for that year now although you know you don't you don't pay the tax now you eventually would pay the tax later in the future when you take the money out the idea is hopefully your income is lower when you have to take the money out and so you pull that money not out at a 37 rate but hopefully a lower rate at a future point in time but the problem is with what wyden points out is that an individual who's only in the 12 tax bracket marginal tax bracket or even the 22 percent tax bracket is not going to get the same type of benefits right as somebody who is in the 37 bracket their savings at tax savings is just not going to be as much because they're not paying as much tax as the person in the 37 bracket so what biden wants to do is he wants to help equalize that with a tax credit what bynum is proposing is a flat 26 tax credit on the amount of contributions people put into their 401k now when i'm talking about 401k here i'm just generally speaking about traditional 401ks i'm not really referring to a roth 401k at this point in time so the way it would work is if a person let's say puts in ten thousand dollars into their 401k they'd get a 26 tax credit on that on the back end so they would have a tax credit of 2600 effectively the way the 401k works now as it stands let's say you have a hundred thousand dollar income you put ten thousand dollars into your 401k you're able to defer that ten thousand dollars of income into a future date and it goes into your retirement account right when you go to file your taxes you don't pay taxes on a hundred thousand you pay taxes on only ninety thousand so that's the way it works now with under biden's proposed plan that would no longer be the case when a person would then put ten thousand dollars in it would not reduce their taxable income at all but they would just get that tax credit of 26 percent on the back end instead that's the main changes now let's look at some examples because i was really interested in to see who does this really affect because none of the articles i saw online none of the videos i saw online they didn't cover at what point or what tax rate does it really does biden's plan actually start to make you pay more in tax and so that's what i've dug into in some of these examples and let's take a look at them and see what you think okay here's the first example i'm going to show you guys i have two different examples for you we're first going to look at how things work under the current law and then we're going to look at how it works under the this would play out under biden's proposed 401k plan changes oh and before i forget to mention it guys the numbers you're seeing in the spreadsheet the tax liability calculations and things like that i have ran through 2020 tax software to try to simulate what the actual tax would be and also for confirmation that my numbers are accurate scout's honor i did run it through tax software for all these scenarios to try to come up with the most accurate information possible when presenting this we have two taxpayers taxpayer one taxpayer two both taxpayers we're going to have a single filing status for consistency taxpayer one makes a hundred and twenty thousand in wages taxpayer two makes fifty thousand in wages because taxpayer one has a higher income his tax rate is twenty four percent taxpayer two's tax rate is twelve percent only because they have a lower income taxpayer one contributes eighteen thousand dollars to their traditional 401k taxpayer two contributes seventy five hundred dollars to their traditional 401k the net tax deduction or the net tax benefit for taxpayer one is the amount of the contribution of 18 000 times his tax rate of 24 percent that's how much of a net tax savings they get because they contribute to their 401k for taxpayer 2 though it's lower because they have a lower tax rate so 7 500 is what they contribute so their next net tax benefits only 900 as you're seeing here on the spreadsheet so that's where those numbers are derived now let's continue on down the line here and we're almost done with this example taxpayer one has an agi of 102 000 because they're able to reduce their gross income of 120 000 by the amount of contributions of 18 000 therefore is left with a hundred and two thousand dollars left in income they then take the standard deduction which this is the single 2020 standard deduction rate and they get a taxable income of eight eighty nine thousand six hundred dollars that's the amount they pay tax on so taxpayer one's tax liability assuming they have withheld nothing the whole year is fifteen thousand five hundred and ninety dollars in that example let's do that let's look at taxpayer two taxpayer two has gross income of fifty thousand they are able to reduce that amount by the amount of their contribution therefore their adjusted gross income their agi is forty two thousand five hundred they take the standard deduction as well their taxable income is thirty thousand one hundred dollars their tax liability is three thousand four hundred and eighteen dollars now let's look at what would happen given the same result are given the same facts but under biden's proposed plan changes ends plan this is how things would play out given the same facts but now we have a tax credit on the back end taxpayer one would make the same amount same filing status same tax rate same everything however when they contribute money to their 401k their traditional 401k 18 000 it does not reduce their adjusted gross income like it did above now because now they're going to have that as their total adjusted gross income the standard deduction still applies let's say and i'm just using a 2020 standard deduction this could change in the future i think it's proposed to go back to about half of this amount don't know but that's what i think has been proposed so let's just keep moving on down the line given these facts and taxable income then for this individual is now 107 600 their tax liability before any tax credits is now nineteen thousand nine hundred and four dollars they however they get a tax credit of twenty six percent right based on contributions of eighteen thousand if we take the eighteen thousand dollars times 26 percent that means they get a tax credit of 4 680 which is pretty good to be honest therefore their tax under their tax liability was 19904 but it gets reduced by the credit of this amount the fort 4680 and therefore they have a remaining tax liability of 15 224 dollars so fifteen thousand two hundred and twenty four dollars i know this is not on the spreadsheet so let me go back up here so fifteen thousand two twenty four compared to their original of fifteen thousand five ninety four so they're actually still better off they're still better off under biden's plan than they were given the old facts and circumstances but you can see it's pretty close it's like within 200 difference so what does that tell me it tells me that as their income goes up it's somebody's gonna become worse off with this credit but for people in the 24 bracket they're probably good they're probably gonna pay the same or or maybe even less tax with the tax credit let's look at taxpayer one now because as i mentioned the our taxpayer two i'm sorry taxpayer two under biden's plan because as i mentioned biden's plan is to help equalize the tax benefit for those who contribute to retirement because he's trying to get people with lower incomes to contribute more to retirement which is hard they're trying but they're trying to incentivize them to to do that so same facts the fifty thousand dollars they contribute seventy five hundred dollars we know under biden's plan that the seventy five hundred dollars it will not reduce their their their agi anymore right under under biden's rules therefore their agi is fifty thousand dollars they take the standard deduction of twelve thousand four hundred taxable income is thirty seven thousand six hundred dollars their tax liability before the credit is four thousand three hundred and eighteen dollars now once again how do we calculate that we just basically take the amount they contributed times 26 percent and there's the credit of 1950. let's look at how their tax liability turned out compared to taxpayer one okay now let's compare the tax liability so we know their tax liability would be four thousand three eighteen before the credit for so four thousand three eighteen we subtract the nineteen fifty the twenty six percent credit they're supposed to get their tax liability after the credit is two thousand three sixty eight under biden's plan before that their tax liability was 3014. so they're actually better off so for people with lower incomes they're actually going to be better off under under this 401k contribution scenario now in the second example i've run a scenario where a person makes even more income to see at what point do they really start to pay more in tax under biden's 401k plan or what point does their contribution serve 401k help them less under this new proposed plan under the current law let's just look at it how how it is now a single person let's say they make 200 000 in wages which means that their marginal tax rate is 32 percent they contribute the 18 000 they're able to reduce their agi by 18 000 right because we take the 200 grand minus 18 they get an adjusted gross income of 182 000. they get the standard deduction let's just say that they that they don't itemize their tax liability is then 35288. so remember that number thirty five thousand two eighty eight now let's look at what happens to them under the same facts but under biden's plan 200 grand in income 32 tax rates okay that's the same contributions the same but now remember under biden's plan can we deduct our contributions no therefore their agi for tax purposes is our their agi is 200 000 they take the standard deduction of 12 400 therefore their taxable income is now and eighty seven thousand six hundred which generates a tax liability of forty one thousand forty eight dollars that's their tax liability there but that's before the credit well we gotta apply the credit with the credit is 26 percent of of their contributions right which is their contributions is eight eighteen thousand times twenty six percent there's the four thousand six eighty and we're going to apply that my mouse tipped over whoops going a little crazy over here you can't see it but okay so now we're going to take 41 thousand for 48 the tax liability we're going to reduce it by the credit so let's subtract the credit out therefore their tax liability their net tax liability now is thirty six thousand three sixty eight compared to what it was up here under the under the current laws of thirty five thousand two eighty eight so now they're worse off right now now at this point people start to become worse off under this plan 35 000 288 subtract it so now they're gonna pay about a thousand dollars more in tax as you can see if you're in the 24 bracket or lower the tax credits probably gonna help you or you're gonna be around the same for the most part maybe within a hundred dollars or two but for the most part you're gonna be about the same but under biden's proposed plan and once you get to the 32 bracket 35 37 well in fact he proposes that he's going to raise the 37 bracket i believe to 39.6 again which is what it used to be you're going to see that that tax credit of 26 that flat rate loses its benefit as your income increases so therefore yes it does help people with lower incomes get a greater benefit it does accomplish that but on the back end though people with higher incomes of course are going to pay more tax so those are that's the pros and cons of this plan in summary from those examples the 401k for high income earners the traditional 401k is going to become less valuable but for low income earners the 401k contributions for traditional 401k is going to become more viable but they think from all the research i can find and i think for the most part i agree with it is if you're a high income earner and you realize you're gonna start to pay more tax using a traditional 401k i think they're going to start to seek out other investment options they're going to maybe look at just putting the money in a roth rom k if they have that as an option they're going to look outside of the 401k altogether which i know concerns mutual fund managers because they make a lot of their money from getting people to contribute to their retirement plans that's where wall street makes a lot of money but nonetheless you can see that their value of their contribution for higher income earners in the 32 bracket or up are going to start to diminish biden also wants to do like automatic 401k enrollment if for example you work at a company that doesn't really have a good 401k or pension option or whatever they want to allow employees to have access to that so they don't know if they're they're going to do a government type of defined contribution plan or if they're going to give the employer incentives to create that plan but something so that any employee no matter where you work can basically contribute to a 401k or type of retirement plan that they can have access to lastly the thing i want to really stress on here whenever a politician whether they're democrat republican whatever comes out and says oh we're gonna do this or this with your retirement plan or your tax deductibility of your contributions the only way to really know like truly truly know if it's gonna help you or hurt you is to simulate it like i did here in tax software to try to determine how that will impact you if there's news articles that talk about this stuff but they never i could not find i spent hours researching this guys i could not find a single article that did this detail of analysis if they just briefly touch on it and they don't go into the detail of who really gets affected and how it all plays out which is why i ran the scenarios for you here and also honestly like i wanted to see for myself who is this was really going to affect and you can see through the examples that it does hurt people once they're in the 32 bracket or higher primarily all right now that you've heard what these proposed changes are and that now that we've went through a few examples how do you feel about having a tax credit of 26 versus being able to take a deduction against your gross income do you like it do you dislike it why are why not thank you so much everyone for spending time with me today over youtube means a lot like the video if you liked it share this with family and friends co-workers so they're aware of these coming changes make sure you're subscribed for future weekly videos around finances investing in taxes live life on caged and i'll see you in the next episode i love you all peace [Music] you

Channel: Money and Life TV

Views: 530,103

Keywords: Biden 401K plans, 401k, stock market, joe biden, Joe Biden 401k Plan explained, 26% Tax credit, 401K plan under biden, How will the 401K change under biden, Bidens plans for your 401K, Bidens proposed 401K changes, 401k changes with Biden, Biden plans to change 401K contributions, 401k changes under biden, President biden 401k plan, Joe biden 401k plans, Retirement plan changes under biden, 401k contribution changes, 401k contribution tax credit, 401K tax credit Joe biden

Id: gImE55o34EQ

Length: 17min 15sec (1035 seconds)

Published: Sun Feb 21 2021