During the 2020 U.S. presidential campaign cycle, social media users circulated a meme claiming that Democratic presidential candidate Joe Biden had announced he intended to tax 401(k) plan retirement accounts:
However, the published Biden campaign plan for addressing savings and retirement issues makes no mention of taxing 401(k) accounts, nor could we locate any speech or other public statement by Biden in which he suggested imposing a tax on such accounts.
Biden did unveil a tax plan that called for "equalizing the tax benefits of retirement plans." Key to that plan was the fact that currently, contributions workers make to retirement plans such as 401(k)s consist of pretax dollars, which reduces those workers' taxable income and thus their income tax liability:
Right now you can deduct your contributions to your 401(k) plan right off the top of your income. So far as the IRS is concerned, the money is invisible for this year’s calculations. Make $200,000 and contribute the maximum $19,500 to your 401(k), and as far as Uncle Sam (and your state) are concerned, you didn’t make $200,000 this year, you only made $181,500.
But, Biden contended, this type of tax benefit is skewed in favor of higher-income families:
The more tax you pay, the more [your 401(k) contribution] saves you. If you have to pay the top, 37% federal tax rate on every extra dollar you earn, deducting that money from your tax return saves you $7,215 in income taxes. But if you’re only paying 10% federal tax on each extra dollar you earn, deducting $19,500 would save you just $1,950.
Therefore, Biden has proposed to “equalize” these benefits across the income spectrum by providing taxpayers with an approximately 26% refundable tax credit in place of the deductions they currently get for contributing to retirement plans:
The current tax benefits for retirement savings are based on the concept of deferral, whereby savers get to exclude their retirement contributions from tax, see their savings grow tax-free, and then pay taxes when they withdraw money from their account. This system provides upper-income families with a much stronger tax break for saving and a limited benefit for middle-class and other workers with lower earnings. The Biden Plan will equalize benefits across the income scale, so that low- and middle-income workers will also get a tax break when they put money away for retirement.
The Tax Foundation independent tax policy organization explained this plan thusly:
Biden proposes converting the current deductibility of traditional retirement contributions into matching refundable tax credits for 401(k)s, individual retirement accounts (IRAs), and other types of traditional retirement vehicles, such as SIMPLE accounts. Biden’s proposal would eliminate deductible traditional contributions and instead provide a 26 percent refundable tax credit for each $1 contributed. The tax credit would be deposited into the taxpayer’s retirement account as a matching contribution. Existing contribution limits would remain, and Roth-style tax treatment would be unaffected.
Is it accurate to assert that Joe Biden said "he's going to tax your 401(k)"? Not really, since the Democratic presidential candidate hasn't proposed taxing the amount of money people contribute to or maintain in their retirement accounts, nor to eliminate the tax reductions workers realize by paying some of their earnings into those plans. But Biden's proposal would likely have the effect, in the words of MarketWatch, of "subsidizing retirement savings for those earning less by raising taxes on everyone else."