Protect your retirement savings from the impact of rising taxes.
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David McKnight graduated from Brigham Young University with Honors in 1997. Over the past 22 years David has helped put thousands of Americans on the road to the zero percent tax bracket. He has made frequent appearances in Forbes, USA Today, New York Times, Fox Business, CBS Radio, Bloomberg Radio, Huffington Post, Reuters, CNBC, Yahoo Finance, Nasdaq.com, Investor’s Business Daily, Kiplinger’s, MarketWatch and numerous other national publications. His bestselling book The Power of Zero has sold over 250,000 copies and the updated and revised version was published by Penguin Random House. When it was launched in September of 2018, it finished the week as the #2 most-sold business book in the world. In 2019 The Power of Zero was ranked as the #9 best financial resource in the country by Forbes Magazine. This book was recently made into a full-length documentary film entitled The Power of Zero: The Tax Train Is Coming. As the President of David McKnight & Company, he mentors hundreds of financial advisors from across the country who specialize in the Power of Zero retirement approach. He and his wife Felice have seven children.
Tax rates 10 years from now are likely to be much higher than they are today. Is your retirement plan ready? Learn how to avoid the coming tax freight train and maximize your retirement dollars.
Joe Biden has historically said that taxes won’t go up for anyone that makes less than $400,000 annually , but that may not be the case. Some people may lose some deductibility in their 401(k) contributions which would result in an effective increase in the tax they are paying.
If you are in the highest marginal tax bracket of 37%, when you contribute $1 to your 401(k) you essentially save $0.37 in tax. Joe Biden’s perspective is that for people in higher income tax brackets, the tax savings is unduly weighted towards them.
The current proposal involves a standard rate at which everyone could deduct money from their 401(k). The exact number is still unknown, but economists are estimating the rate would have to be around 20% to be revenue neutral.
This would basically mean that instead of deducting the full $0.37 at the highest marginal tax bracket, you would only deduct $0.20. For people in lower tax brackets, they would get a higher deduction than they otherwise would have.
The ramifications of this proposal would mean that people in the higher income tax brackets of 22% or above will skip the deduction. Instead of getting the deduction, higher income earners will likely start paying the taxes on their money today, especially given that we are in a rising tax rate environment.
This negates the usual discussion about whether it’s superior to save on paying the taxes today and waiting until retirement, since the deduction is not likely to be much higher than the tax rates you will face in the future. The net effect of all this is that it is going to accelerate the flow of money into tax-free accounts.
As things are, there isn’t much reason to forego a 37% deduction today, but if that deduction changes, it’s not going to be very attractive at all.
Given this proposal, we are going to see more people foregoing putting money into their 401(k) and looking more towards tax-free options.
Despite Joe Biden’s pledge to not raise taxes on anyone making less than $400,000, people who make $200,000 or more will find they will be paying more taxes if they no longer have the ability to deduct 401(k) contributions at their highest marginal tax bracket.
Anyone who is in the 22% tax bracket or higher will likely stop making 401(k) contributions and start redirecting those contributions to Roth 401(k)’s or other tax-free plans. The silver lining to this is that more people will contribute to tax-free accounts and end up being better prepared for an eventual rise in tax rates.
If Biden does get elected in November, many people are going to have to reassess their approach to saving for retirement. Another thing to keep in mind is the rumor that should Joe Biden get elected, he may bow out at the two-year mark. This could potentially lead to 10 years of Kamala Harris in the presidency.