Biden tax plan may spur boost in Roth retirement accounts


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Biden tax plan

Generally, Roth accounts make sense if taxpayers think their income-tax rate will be higher when they withdraw money in retirement.

In that case, it would yield a financial benefit to pay the tax now at a lower rate.

Biden’s tax plan may make Roth accounts more attractive, especially for wealthy households.

The Biden administration has signaled its intent to raise taxes for people whose income exceeds $400,000 a year to help finance its legislative agenda.

The White House hasn’t officially proposed increases on the individual-tax ledger. The administration recently proposed a corporate-tax hike to fund an infrastructure measure.

But Biden is expected to propose raising the top income-tax rate to 39.6% from the current 37%. That would restore the top rate to its level before the 2017 Tax Cuts and Jobs Act.

“I think we kind of almost know, or by end of the year we’ll know, the [top] rate will jump from 37% to 39.6%,” said Robert Keebler, a certified public accountant based in Green Bay, Wisconsin.

Estate tax

Not just the rich

If [larger conversions] make sense at 37%, they’ll make more sense at 39.6%.

Robert Keebler

certified public accountant

That structure would benefit lower earners. (A taxpayer in the 12% tax bracket would get a 20.5% deduction, for example.)

The highest earners would get the equivalent of a 20.5% tax deduction now on their pre-tax savings, but would pay tax at a higher, 37% rate later.

That dynamic means earners in the 22% tax bracket or higher would likely be affected. That would encompass single taxpayers with about $40,500 or more of annual income and married couples who make over $81,000.

That reduced tax break may make Roth accounts more attractive instead, Keebler said.


There are caveats for those who wish to convert a traditional account to a Roth. For one, they need the cash on hand to pay the associated tax on the conversion.

It may also make sense for those doing conversions of modest amounts to wait until the end of 2021, when there’s a little more clarity around changes to tax law, Keebler said. At this point, these are just proposals and may not become law.

Larger conversions may be best accomplished by doing it piecemeal over the year — perhaps split between April, July, October and year-end, Keebler said.

“For larger conversions, if they make sense at 37%, they’ll make more sense at 39.6%,” he said.

Taxpayers should also be aware that a Roth conversion will raise their taxable income and could potentially push them into a higher tax bracket.

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