Within the next month we’ll be looking at a new administration heading into the White House. The overall ability to effect change will depend on control of the Senate and that won’t be decided until early January (hopefully). Just to be prepared, we review some of the things that may be on the cards for retirement planning and take a look at some potential investment planning scenarios in the event of a split Congress. We also look at some surprising data on how the market could potentially perform, and touch on the changes that may be coming to estate taxes.

Changing the Tax Benefit Structure of Retirement Plan Contributions

Retirement contributions currently reduce taxable income – they’re essentially a tax deduction. One plan that’s been bruited is changing this to a refundable tax credit (analysts claim it would be equal to 26% of the amount contributed) which would result in a “matching contribution” because it would be deposited into the individual’s retirement account. It would look like this in action: A $10,000 contribution to a 401(k) in a given year would produce a “matching contribution” of $2,600 – regardless of the taxpayer’s marginal tax rate.

This would encourage retirement saving and benefit low- and moderate-income taxpayers. For individuals that currently contribute the maximum to their 401(k), it does provide an avenue to contribute more. But it would represent a tax increase for higher tax brackets.  Even with a friendly Senate majority, this one seems like a stretch. But a Roth retirement account may be a more appealing option for higher income individuals if this plan does come to fruition.

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A Caregiver Catch-Up Benefit

The pandemic has seen an acceleration of an existing trend: people leaving the workforce to care for children or parents. Stopping work doesn’t just reduce income before retirement – it can have a long-term effect on retirement income as the opportunity to contribute to a workplace retirement plan is gone. This can partially be made up with a Spousal IRA, but the Biden proposal to create a means for caregivers to make catch-up contributions to retirement accounts even when they are not earning an income could go further. There’s some reason to think this could be reality – a similar idea has already been proposed by bi-partisan legislation introduced in 2019 as H.R. 3078, the Expanding Access to Retirement Savings for Caregivers Act.

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Secure Act 2

Days before the election, bi-partisan legislation to expand on the Secure Act was introduced. Dubbed “Secure Act 2”, it has provisions that could expand retirement savings.

– Increase Required Minimum Distributions to 75 from 72

– Increase the IRA $1,000 catch-up contribution for those over 50 by indexing it to inflation

– Create a “step-up” in the 401(k) catch-up contribution. Currently, those age 50 and over can contribute an additional $6,500. This limit would increase to $10,000 for those over 60

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Estate Taxes

President-elect Biden has a very thorough plan for what he’d like to do about taxes, but whether it makes it through Congress immediately will depend on what happens in January with the Senate races. One element of this is to restore the gift and estate tax exemption to the level it was at before The Tax Cuts and Jobs Act of 2017 doubled the exemption from previous levels. It is currently $11.58 million per person.

Whether or not legislation is passed to change it, the enhanced exemption is set to automatically sunset at the end of 2025 and return to $5 million, adjusted for inflation.  If you are likely to be affected by this change, trusts are a great way to minimize taxes. Even if your estate doesn’t exceed the exemption, trusts are an extremely useful estate planning tool to maintain privacy, simplify the transfer of assets by removing them from the probate process, and provide for a legacy.

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The Split Congress

Before the election, it appeared that the stock market was getting comfortable with a Biden win. Extra stimulus, infrastructure spending, etc. appeared to outweigh concern over potential corporate tax increase.

Post-election and given the likelihood of a split Congress, the market has still responded positively thus far (November 16). Turns out – that’s not unusual.  David Henry, investment manager at U.K. firm Quilter Cheviot, was quoted by CNBC as saying that history suggests this election outcome could actually be the “best-case scenario” for stock investors. Since 1945, analysis of all possible political scenarios showed that a Democratic president and a split Congress generated nearly 14% average annual returns.

Extrapolating that to a new administration, it seems likely that increased regulation will be difficult to implement. For sectors that were fearing this – like healthcare, this could be a benefit.

A new administration would have foreign policy under its’ control and could potentially approach global trade relations in a way that would reduce the headline-driven, top-down market volatility. This could create a good environment for businesses that do well in more certain conditions.

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Bottom line

There’s a lot to think about and watch for as we see how things shake out, but there are always moves you can make to keep your investments on track and potentially growing so that they reward you with the retirement you want to have and the legacy you want to leave. To see if your financial plan is on track or to discuss potential investment strategies that may fit your situation, schedule a complimentary financial analysis below.

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