With a new president, new legislations that concerns a majority of the people are expected to come to life in 2021 and beyond. As soon as Biden sworn into the office, a proposal that will shape the 401k retirement plans arrived. The proposed changes to the 401k are mostly positive but if you’re a highly compensated employee, know that the tax breaks you get to be slightly decreased.

Firstly, the contribution limits aren’t going to change – at least for the time being. What will change is the way the tax breaks are given to taxpayers for their 401k contributions. With the current rules, the taxpayers who contribute to a traditional or other qualifying 401k retirement accounts get a tax deduction in exchange for their contributions.

Tax Break for the 401k Contributions

If someone contributes $10,000 during the year, the deduction is $10,000, it’s as simple as that. This has to do with how traditional 401k retirement accounts are funded. Because the funds are made with pretax dollars, the account holder will pay taxes later on when he or she withdraws money. The way the tax break works is going to stay the same but instead of a deduction, you will get a tax credit for your contributions which is much valuable than a deduction. That said, the tax break will be higher.

On the other hand though, if you’re a highly compensated employee or you make slightly lower than what the IRS considers someone as such, the tax break you get will be insignificantly decreased. On the other end of the spectrum though, there is the opposite. Those with low to moderate income – pretty much anyone that’s not close to being a highly compensated employee – will get a higher tax break. The detail of how this is going to work is yet to be known but as soon as more information on that comes out, we’ll keep you updated.

401k Retirement Account Without Employer

The only way to get a 401k currently is through an employer sponsoring it. If your employer doesn’t sponsor 401k, you won’t get one. It’s as simple as that.

Unforutunately, about one third of workers in the United States aren’t covered by a retirement plan at work. This is planned to be changed with Biden’s proposal. It aims to create an automatic 401k for every employee in the United States. Since this will mean everyone will have access to a 401k retirement plan, workers will be able to contribute more towards their future.

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