The Washington Post

Would tax-hike plans affect your retirement? Probably not.

- Michelle Singletary THE COLOR OF MONEY michelle.singletary@washpost.com

Any mention of a tax hike and people’s blood pressure rises.

Tax revenue runs the government, and as a new budget cycle approaches there’s a lot of discussion about who’s not paying their fair share.

Competing tax proposals from the White House and Congress include increases in individual and capital-gains tax rates — but just for the super-wealthy.

It was 2017 when Congress enacted major tax legislatio­n that gave a huge tax break to corporatio­ns but also expanded the standard deduction. Still, many felt the uber-rich weren’t taxed enough.

“Much of the income of wealthy households doesn’t appear on their annual tax returns, and much of what does appear enjoys special tax breaks or discounted rates,” a report this week by the Center on Budget and Policy Priorities points out. “. . . These changes would make the tax code more equitable by taxing income from wealth more like income from work.”

So much can change before any legislatio­n is passed and signed into law. But for now, here are answers to questions you might have on how the proposals could affect your retirement planning.

What individual tax hikes are being proposed?

The Biden administra­tion’s proposed American Families Plan would increase the top marginal income-tax rate from 37 percent to 39.6 percent for those earning over $452,700 for single filers, $481,000 for headof-household filers and $509,300 for joint filers, according to an analysis of the proposal from the Tax Foundation.

The plan would tax long-term capital gains as ordinary income for taxpayers with an adjusted gross income of more than $1 million. This would result in a top marginal rate of 43.4 percent when including the new top marginal rate of 39.6 percent and the 3.8 percent Net Investment Income Tax, according to the Tax Foundation.

The House Ways and Means Committee released a competing proposal this week that would also increase the top individual rate to 39.6 percent.

This marginal rate would apply to single filers with taxable income over $400,000, heads of households over $425,000 and married couples over $450,000, according to the House plan.

The top capital gains rate would increase from 20 to 25 percent.

For most people, these changes shouldn’t affect their retirement accounts, said Mark Hamrick, senior economic analyst at Bankrate.

“The average American, meaning someone who is middleinco­me, probably doesn’t have that much to be concerned about here,” he said. “But what I would say is just continue to watch this space in the coming years.”

The need to raise tax revenue to address the federal deficit might change things, Hamrick said. “The math has not been adding up for quite some time.”

How will the House tax plan affect Roth IRAS?

A Roth account is funded with after-tax dollars. Future withdrawal­s remain tax-free as long as you meet certain holding requiremen­ts. The current annual limit for a Roth is $6,000. If you’re 50 or older, you can contribute an extra $1,000.

The Roth 401(k) is increasing­ly being made available in employer workplace retirement plans. You still fund the Roth with after-tax dollars, but the annual contributi­on limit for a Roth 401(k) is the same as for a 401(k), which in 2021 is $19,500. People 50 and over can contribute an extra $6,500.

There are income limits to contributi­ng to a Roth. Your modified adjusted gross income must be under $140,000 for the tax year 2021 if you file as an individual. If you’re married and file jointly, your MAGI must be under $208,000.

But a backdoor loophole allows higher earners to convert their traditiona­l IRAS or 401(k)s into a Roth. A Propublica investigat­ion found that Peter Thiel, one of Paypal’s founders, had accumulate­d $5 billion in a Roth IRA.

This revelation has led to a lot of discussion about limiting what rich folks can stash in a Roth.

The House legislatio­n would create new rules for taxpayers with very large IRAS and workplace retirement accounts. Contributi­ons would be prohibited if the total value of an individual’s IRA and workplace retirement account exceeded $10 million as of the end of the tax year.

The limit on contributi­ons would apply only to single taxpayers (or taxpayers married filing separately) with taxable income over $400,000, heads of households with taxable income over $425,000 and married taxpayers filing jointly with taxable income over $450,000.

Additional­ly, if an individual’s combined traditiona­l IRA, Roth IRA and workplace account balances exceed $10 million at the end of a taxable year, a required minimum distributi­on, or RMD, would be required for the following year.

“They’re looking at putting gates around retirement accounts to prevent them from being supersized,” said Eric Bronnenkan­t, head of tax for the online financial adviser Betterment. “For the average person, I’m not too worried that they are going to bump up on these limits.”

 ?? STEFANI REYNOLDS FOR THE WASHINGTON POST ?? Visitors at the Capitol last month. Tax proposals from the White House and Congress include hikes in individual and capital-gains rates — but just for the super-rich. “The average American . . . doesn’t have that much to be concerned about here,” said Bankrate’s Mark Hamrick.
STEFANI REYNOLDS FOR THE WASHINGTON POST Visitors at the Capitol last month. Tax proposals from the White House and Congress include hikes in individual and capital-gains rates — but just for the super-rich. “The average American . . . doesn’t have that much to be concerned about here,” said Bankrate’s Mark Hamrick.
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