- Janet Yellen proposes a flat tax credit rate for retirement fund contribution
- What would this mean for high earners?
We’re all working towards retirement. Fortunately, there are many options when it comes to saving for those blissful post-work years, including forming and investing in the two major account types: IRAs and 401(k)s.
Recently, Janet Yellen has proposed revoking tax deductions from these accounts and replacing them with a tax credit. This policy change would effectively create a flat tax credit rate among all retirement fund savers.
Essentially, under this flat tax credit rate, anyone earning any income, no matter their bracket, will receive a $260 credit per $1000 of retirement investing— effectively 26%. Taxpayers in the 10% and 12% tax brackets would benefit from their change, while those in higher brackets lose out on a large portion of savings.
Here’s an example of how it works:
- High Earner– Someone in the 32% income tax bracket (under age 50) can contribute the current 401(k) maximum of $19,500
- Currently: Receive tax savings of $6,240 (32% of $19,500)
- With Change: Receive tax credit of $5,070 (26% of $19,500)
- Low Earner – Someone Earning $50,000 in the 12% tax bracket contributes 15% of their pay ($7,500)
- Currently: Receive tax savings of $900 (12% of $7,500)
- With Change: Receive a tax credit of $1,950 (26% of $7,500)
How would this change affect people’s future retirement investment strategies?
Taxpayers will need to reevaluate and manipulate their retirement planning in order to maximize benefits.
For help managing your retirement accounts and maximize your savings, call the experts at DSJCPA at 516-541-6549 and visit our website.
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