These Biden proposals could help your finances
Joe Biden’s proposals on wealth building, taxes and other issues are gaining fresh scrutiny. So, too, for some other ideas advanced by leading Democrats.
It’s way too early to know if these proposals will ever get enacted, but here are a few interesting ones that would affect many mainstream Americans.
Investors for decades have grown accustomed to receiving tax deductions on money they contribute to Individual Retirement Accounts and workplace 401(k) programs. The tax breaks are more valuable to people in higher tax brackets, who typically have more money to invest.
‘Equalizing’ 401(k) investing
One Biden proposal would shake up that model by replacing the current system of deductible contributions with a flat tax credit instead. Credits reduce taxes owed while deductions lower the amount of income subject to taxes.
“The idea is to make everyone’s contributions the same amount of money,” said Jeffrey Levine, director of advanced planning at Buckingham Wealth Partners. “It would effectively flip the retirement savings paradigm on its head.”
Under the Biden plan, investors in retirement accounts would receive a credit estimated at 26% of the dollar amount contributed. That would tend to favor lower-income workers But it would diminish the tax incentives for high earners.
A 26% credit would roughly equalize that and correspond to a tax deduction at a 20.5% marginal rate. The plan is designed to be revenue neutral for the federal government.
If the idea becomes law, it likely would encourage some people to put more money into Roth IRAs or Roth 401(k) plans, as their appeal doesn’t depend on front-end deductions or credits but, rather, the ability to withdraw money tax-free.
Roth conversions could become more popular, even though they require people to pay taxes now when moving money out of traditional IRAs or 401(k)-style plans.
Downpayment assistance
Housing didn’t emerge as a major issue in the election. Still, Biden has voiced big plans for housing, including $640 billion in federal investments over 10 years to give all Americans access to safe, affordable and energy-efficient dwellings.
Lending Tree recently summarized Biden’s housing platform.
The many proposals include creating a bill of rights for homeowners/renters and devising new appraisal standards to weed out racial bias in the homeownership/mortgage process.
One especially impactful, and expensive, Biden proposal would create an advanceable tax credit of up to $15,000 to encourage more first-time homeowners.
Under Biden’s plan, “Homebuyers would get the tax credit when they purchase a home … instead of paying out of pocket then getting refunded at tax time.”
The Biden camp hasn’t released many details, such as the potential cost of this tax break or eligibility rules.
But there is a precedent for this type of legislation, as Congress enacted a $7,500 first-time homebuyer credit (later increased to $8,000) to spur sales activity during the Great Recession.
But the goal here wouldn’t be market stimulation so much as broadening the homeowner base.
Investments at birth
If politicians want to ensure all Americans get off to a good financial start, “baby bonds” could get a look under a Biden presidency.
Under this concept, proposed largely by other Democratic leaders, the federal government would contribute money to savings accounts held by minors. When a recipient turns 18, the accumulated funds could be used for college, to buy a home, to start a business.
One proposal, the American Opportunity Accounts Act, from Sen. Cory Booker, D-N.J., calls for the government to seed accounts with $1,000 for every child at birth, with subsequent annual contributions of up to $2,000 (with amounts varying based on family income or assets). Contributions would be invested in Treasury bonds.
In an analysis, investment researcher Morningstar said it supports the baby-bonds concept as a way to help get children from lower-income families off to a good start, though the firm hasn’t endorsed any specific legislation.
“Baby bonds would not be a panacea, but they hold promise for addressing the racial wealth gap,” said the report co-written by Aron Szapiro, Morningstar’s head of policy research.
But there are challenges. Morningstar suggests allowing families to invest in various mutual funds or exchange-traded funds, not just Treasury bonds, while ensuring that recipients receive sound investment advice along the way.
Szapiro estimates the baby-bonds program would cost the government somewhere between $60 billion and $80 billion annually.