The recent presidential election had high stakes for the future of investments and retirement planning. Many people’s retirement plans have already drastically changed in recent months. The SECURE Act, signed at the end of 2019, made it possible to defer mandatory minimum withdrawals for a longer time and to continue contributing to traditional IRAs as long as you’re earning income.
People saving for retirement have been especially anxious because of financial turmoil caused by the coronavirus pandemic, and the election only added to the unease as people anticipated policy changes and new laws. Retirement policy is one of the few government issues that enjoys bipartisan support, but the two political parties still take markedly different approaches to the topic.
Joe Biden ran on a platform that included some ambitious changes to retirement policy, including Social Security benefit increases, higher payroll taxes on incomes above $400,000, and new rules about retirement saving intended to make it easier for lower income earners to invest in their futures.
These legislative goals will face challenges in Congress, but it is likely that some laws about retirement savings will change. Pay close attention to any proposals and ask your financial advisor how these potential shifts could (or should) affect your retirement strategy. When you’re prepared for the changes ahead of time, you can take full advantage of the shifts and ensure you’re giving yourself the best chance at a secure, comfortable retirement.
The Most Likely Changes Under a Biden Presidency
While Biden’s platform for retirement may not pan out, especially in the short term, retirement policy will likely be affected by SECURE 2.0. This piece of legislation was introduced just a few weeks before the election by Ways and Means Chairman Richard Neal, a Democrat, and Ranking Member Kevin Brady, a Republican.
The initial SECURE Act received wide bipartisan support, and it’s likely that a divided Congress would agree to pass this similar piece of legislation before the more ambitious goals that Biden has proposed. The new bill would expand auto-enrollment in employer-sponsored plans and provide assistance to small businesses in starting retirement plans. In addition, the bill would raise the minimum distribution age to 75 and simplify the Saver’s Credit to make it more applicable to low-income households.
The goal of SECURE 2.0 is to get more people saving for retirement using qualified plans like the 401(k). The latest data from the Federal Reserve shows that only 50 percent of American households have a retirement plan, which is only a slight improvement from 2001. Unfortunately, the likelihood that younger households have a retirement plan actually decreased from 2001 to today.
The legislation also proposes to provide 401(k) matches to people making student loan payments, which would help younger heads of households save. The act also addresses some of the more difficult situations for saving, including small business benefits and enrollment qualifications.
How You Should Approach Retirement Saving Under Biden
Many savers may wait to see what Congress passes before they make changes to their retirement saving strategy. If you’re already saving, continue to do so and increase the amount you put away, if possible. Presidents rarely have a major effect on overall stock market performance, so putting as much money away now will help you take advantage of compounding interest—there’s rarely any downside to increasing your contributions. The basic guidelines for saving, whether that means starting to put money away or increasing your current amounts, are basically the same regardless of who sits in the Oval Office. At the same time, following Congressional sentiment on different proposals is also important so that you can make changes as necessary as soon as new legislation is passed.
SECURE 2.0 is largely meant to benefit people in lower-earning households. These individuals may want to start saving now. In this case, a Roth IRA may be the best option. With a Roth IRA, contributions are made on an after-tax basis, so you don’t get the immediate reduction in taxable income that a traditional IRA offers. However, money can be withdrawn tax-free from a Roth IRA during retirement because the taxes were already paid when the initial contribution was made. This type of account is ideal for people who estimate that they are in a lower tax bracket now than they will be in retirement.
It’s also a good idea to see if you qualify for the Saver’s Credit under the current policy. Research has shown that less than 40 percent of American workers even know about this tax credit, and only a quarter of the people who are eligible actually claim it. A tax credit is an amount of money you can deduct from the taxes you owe.
The Saver’s Credit applies to people making contributions to 401(k)s, other employer-sponsored retirement plans, and traditional and Roth IRAs. In 2020, people with an adjusted gross income less than $65,000 qualify. The credit is worth a percentage of the money you put into retirement savings. If you make less than $39,000, you get a 50-percent credit up to $4,000. The credit decreases as your adjusted gross income rises.