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Biden's 401(k) Plan Is Vague, but Worth Paying Attention to

Joe Biden’s tax plan would overhaul retirement plan tax benefits.

Policymakers have had little luck in reforming the tax structure for 401(k) defined contribution plans (as well as their siblings 403(b) and 457 plans) for decades. It’s been easy to add benefits—new ways to save such as the SIMPLE IRA, higher contribution limits, and a “Roth” option to use post-tax money that can grow and be withdrawn tax-free—but no one has had much luck reforming the basics of the system. Biden is going to try if he wins the upcoming presidential election, and that has important implications for retirement savers.

For a quick review, at least for the retirement plan participant, the tax benefits for saving in a traditional 401(k) or other tax-privileged retirement plan are inversely related to income. That is because these contributions reduce a wage-earner's taxable income, and the United States has a progressive tax system. Under a progressive tax system, tax rates increase as workers earn more money. The highest tax rate a person pays is called their “marginal rate.” Since higher-income people have higher marginal tax rates, they benefit the most when they reduce their taxable income by contributing to a retirement plan.

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