What are some of the most important investments one can make as a fellow architect? Investing in oneself and also in a quality retirement plan. How does a change in administration affect retirement contributions? Here we will explore President Biden’s proposed changes and how those differences may impact an architect’s plans for the future.
President Joe Biden has laid out some potential changes to 401(k) savings programs for retirement and these differences may have some major tax repercussions for architects throughout the country. The proposition by President Biden seeks to remove the current tax deduction for 401 (k) contributions and replace with a tax credit. Why should an architect care about this difference should the law be passed? That answer depends on where you are in your career.
If you are early in your career, there is a high likelihood that this tax change may be of benefit and result in a larger tax benefit. If you are a higher earning architect, the potential exists for this tax change to be to your detriment. First, let’s discuss the nuances of the plan:
-The tax deduction for the 401 (k) contributions will vanish
-A tax credit for workers rather than a deduction for 401 (k) contributions
-The tax benefits for higher earners for 401 (k) contributions would be reduced, whereas the advantages for lower and middle earners increase.
-An automatic 401 (k) would be established for those in workplaces without access to these types of retirement plans.
-Catch-up contributions are available for caregivers
The way in which the current tax system is organized allows for individuals to allocate a percentage of salary into his or her 401 (k) and postpone paying taxes until the funds are withdrawn from that account during retirement years. This tax benefit yields the greatest tax advantage for persons in the higher tax brackets. For example, a person with an $80,000 salary per year who is in a tax bracket of 14% can dedicate $10,000 to a 401 (k) and realize a tax savings of $1,400. A person who earns $400,000, in contrast, who is in a 35% tax bracket can put $10,000 into the 401 (k) program and create a tax break of $3,500.
The plan from the new administration would terminate the tax deduction for 401 (k) contributions and substitute that deduction for a tax credit. President Biden believes that this tax change will create parity in the retirement system. The tax credit under the newest plan would be a credit set at 26% no matter where one’s income level may be. 403 (b) plans for those employed by universities and nonprofits will be subject to that change as well, in addition to those with 457 plans who work for the state or local government.
Is the potential change something architects should worry about? Only time will tell. The moral of the story: Architects in the middle and lower earning ranges should increase their retirement savings as this simple step will increase the amount of money you get back in the form of a tax return at the end of the year. For those in the higher earning range, this change may make retirement less advantageous than it has been historically. While it may be less advantageous from a tax perspective to contribute to a 401 (k), 403 (b), or 457 plan for those who have an employer-sponsored plan, this change may benefit those architects who engage in more entrepreneurial ventures and hang out his or her shingle. While only time will tell, these new findings are something that The Wealthy Architect will continue to monitor.
