How The New Administration Could Affect Your Retirement?
By Preston Rosamond
Regardless of where you fall on the political spectrum, it is true that each new presidential administration ushers in policy changes. A changeover in administration in the White House will likely have at least some impact on your personal finances, which can cause uncertainty or even fear for many of us.
A change in our country’s leadership can be a good time to reevaluate your financial plan. Broadly speaking, you want to make sure tax climate and government policies are taken into account, and here are some specific potential changes to keep an eye on.
Social Security Reform
Social Security trust funds have been running a surplus since 1982. Right now, the surpluses are predicted to stop in 2020 and the system will rely on incoming interest payments to make up the deficit until 2033. (1) At that point, if no changes are made, benefit payments may shrink to 80% of what Americans expect. (2) If you’ve been following this story and are confused about the 2033 date, you didn’t read that incorrectly. Previous estimates were that the trust fund would be depleted by 2035, but due to the COVID-19 pandemic and related economic struggles, the timeline has been pushed up 2 years. That’s not good news if you’re planning to retire soon.
President Biden has proposed several key changes intended to address the general issue of long-term Social Security solvency while also making benefits available to certain populations. Biden has proposed to increase Social Security benefits to 125% of the federal poverty level, increase benefits for Americans who have been receiving payments for 20 years or more, and pay greater benefit amounts to widows and widowers. (3) The President has proposed to fund the expansions, in part, by imposing higher Social Security tax rates on earnings between $400,000 and $600,000. (4) Another option that could improve funding prospects for 75 years is to raise the payroll tax 1.2% for everyone—that includes both employees and employers.
Estate Tax Law Changes
The Biden plan includes changes to the taxation of intergenerational gifts and estates. The plan could include a repeal of the “step-up in basis” that currently allows heirs to legally avoid paying tax on capital gains prior to the transfer of assets. In addition, the maximum long-term capital gains (LTCG) tax rate could increase from its current 20% to a new cap of 39.6%. The lifetime Generation-Skipping Transfer Tax (GSTT) exclusion, currently set at $11.7 million for 2021, is already scheduled to sunset in 2026, resulting in the imposition of estate taxes on estates exceeding $5.8 million. Additional proposed legislation could further reduce the exemption to $3.5 million, the limit in 2009. (5)
Changes To 401(k) Plans
The Biden administration has reportedly proposed to change the way contributions to a 401(k) plan affect tax liability. The plan would replace the traditional tax deferral with a flat 26% tax credit. The change would have the effect of equalizing tax deductions between income brackets. Since lower earners are taxed at lower rates, tax deferrals under the current structure results in greater current-year tax savings for high-income earners. The Biden plan would also create “automatic 401(k)” accounts, designed to offer the benefits of a 401(k) plan to individuals who are not offered retirement plans through their jobs. (6)
Reinstating The Pease Limitation
An additional provision of the Tax Cuts and Jobs Act (TCJA) could be rolled back: the repeal of the Pease Limitation, which was first introduced in 1991 and has since been repealed and reintroduced twice. The Pease limit began to incrementally reduce the tax deduction value by 3% on certain itemized deductions for taxpayers whose adjusted gross income (AGI) exceeded specific thresholds (which changed each year). In 2017, the last year before the recent repeal, the AGI limit was $261,500 for single filers. If the Pease limit were reinstated, high earners would lose the tax-saving benefit of commonly itemized deductions.
What Does This Mean For You?
If you have not recently reviewed your financial plan, now is the time to reevaluate. Don’t let the complicated figures and jargon impact your retirement. Speak with a qualified financial advisor to make sure your strategy is aligned with the potential tax law changes that we may see over the next several years. The Rosamond Financial Group is here to help you maximize your wealth and minimize your tax liability. Call us for a complimentary consultation at 830-798-9400 or email smrosamond@rosamondfinancialgroup.com to discuss the big picture and set your finances up to succeed no matter what happens.
About Preston
Preston Rosamond is a financial advisor and the founder of The Rosamond Financial Group Wealth Management, LLC with nearly two decades of industry experience. He provides comprehensive wealth management and financial services to individuals, professionals, and families who enjoy simplicity and seek a professional to help them pursue their goals. Preston personally serves his clients with an individual touch and a sincere heart, and his servant’s attitude is evident from the moment you meet him. Learn more about Preston or start the conversation about your finances with him by emailing smrosamond@rosamondfinancialgroup.com or schedule a call with our online calendar.
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(3) https://joebiden.com/older-americans/
(4) https://www.wealthmanagement.com/high-net-worth/guide-potential-tax-law-changes-under-biden
(5) https://www.jdsupra.com/legalnews/the-new-administration-brings-several-7260938/