Understanding Your Retirement Taxes in 2020
There are two certainties in life, death and taxes. The government always wants their share and depending on which party is in office, it may be more. President Biden has a more aggressive approach on taxes. As with many Democrats, their financial views tend to be through a lens of increased taxes.
When it comes to your retirement, it is always important to remain privy to the current tax situation. Any changes may require you to alter your current plans to maximize your financial benefits and minimize your tax bill. This article will highlight a few areas to monitor as we move forward with the Biden administration.
One of the most used retirement vehicles is the employer offered 401(k). Participants use pre-tax dollar contributions to build wealth. In the current tax structure, it tends to benefit the higher income earners because of their high tax bracket.
Barons.com reported that Biden wants to level the playing field by giving tax credits for each dollar saved. This means no matter your income, you would receive the upfront benefits higher income earners do.
What that means for retirement is you may have more money to contribute into an IRA or traditional brokerage account. The upfront benefits can put money back into your pocket and incentivize contributing.
Earlier Medicare Enrollment
A benefit that might come to fruition is a lowered enrollment age for Medicare. This could prove to be extremely beneficial because it may allow individuals to retire early, especially those impacted by the COVID-19 pandemic.
Under current regulation, you must be at least 65 to enroll. While this may not be a direct impact on taxes, it can offer you some flexibility when planning for taxes during retirement.
Social Security Tax
Another idea being discussed is an increase in the social security tax. This would pertain to those of you earning more than $400K a year. Under the new proposed idea, people that earn more than $400k would be required to pay 12.4% in taxes, without the ability to earn increased benefits.
“This is intended to make up some of the current gap between Social Security inflow and outflow while not punishing what might be referred to as the upper middle class.”
How this impacts your retirement is you may find it beneficial to increase your contributions to retirement plans such as a 401(k) while you are still earning. This is especially true for those of you slightly over the $400k threshold. Combined with the potential changes to 401(k) taxation and it may be a win-win.
Understanding taxes can be a unique puzzle that ultimately comes down to your individual situation. While it seems intimidating, simply taking one step at a time is the best way to begin. If you need guidance, be sure to sign up for the Retirement 101 webinar, where several retirement topics will be discussed.