If Joe Biden becomes the next president, these are the effects that will have on your Railroad Retirement.
Welcome everyone to the Highball Advisors Railroad Retirement whiteboard. My name's John McNamara of highball Advisors and today we're going to talk in a nonpartisan way about Joe Biden's policies on Railroad Retirement. Has he specifically addressed Railroad Retirement? Yes and no. As we know, Railroad Retirement's two parts. You have the Railroad Retirement annuity and you have your 401K, that's going to make up your Railroad Retirement. When you leave the railroad, those are going to be the two main factors of your retirement lifestyle.
Let's address what Joe Biden has spoken about social security and what is social security? That's tier one. Tier one part of your Railroad Retirement is going to be the social security part. As we know, social security runs out in 2035. Things have to be addressed. You can either cut benefits or you can increase the retirement age, raise taxes, whatever, it has to run out. It's going to run out in 2035 so things have to get done.
What Joe Biden has come up with is he will apply the payroll tax, which is currently 6.2% up to 137,700. He will say, "Okay, the payroll tax will stop at 137,700 and then it will kick back in for those making $400,000 and over. Another 6.2% on payroll over $4,000." That's the way he feels that he can stop the social security train wreck, no pun intended, at 2035. In addition to that strategy to help alleviate social security, he's going to increase widows and widowers, give them a 20% increase. And then also, if you've been on social security for 20 plus years, he's going to increase that also for savings and higher healthcare cost. Those are his proposals for social security, ie., actually tier one, this is what he plans on doing. I don't know if it's going to work. I don't know if it gets through, but this is what he's talking about and we'll leave it up to the economists and the quants to figure out if that's enough money to fund social security. I'm not so sure, but we'll see what happens.
Now that's one part. That's the Railroad Retirement annuity. Tier two's unaffected. He hasn't mentioned anything about tier two so I'll leave that alone. Now we'll go over the 401K part of it. Currently you get deductibility on your 401K contributions. If you let's say make a $100,000 a year, you contribute $10,000 to your 401K, as far as the IRS knows, your adjusted gross income for the year is $90,000. Just that's the simple example. However, he's going to eliminate that Deductibility, it's no longer you'll get $10,000 deducted. Instead, he'll give you a 26% refundable tax credit. What that means, instead of reducing your income, you'll pay the $10,000 into your 401K after tax at your tax rate and put into your account 26% of whatever you invested. If you put in $10,000, you would get $2,600 kind of a top up, I guess, from the government.
That kind of helps the lower tax brackets, encourage them to save more. However, if you're at a higher tax bracket above 26%, you're 32s, 37, that's going to be a tax hike on you because you won't get that full deductibility that you once did. Instead, you'll get the 26% credit there. Just to give you an example, married, file jointly, between 171-326 income, you're at a 24% rate there so you would get the 26% and you would actually come up ahead. As you can see, it's really the higher income earners here, 326 to 414, which is 32%, you're taking the 6% hit and then obviously higher up you're taking even a bigger hit. The 37% rate is taking an 11% hit.
What will happen there is your higher tax rate people, they probably won't contribute as much into the 401K as they might look at a Roths, pay the tax now, that type of life insurance vehicles. Anything to defer taxes. Those are the proposals that Joe Biden has for Railroad Retirement. Affect the annuity, affect your 401K. It's a good thing to learn. Do I know these proposals if he wins are going to happen? I don't know. We'll just see how it all shakes out, but I thought I'd let everybody know. As always everyone, please subscribe to my YouTube channel. If you like this video, give it a thumbs up. I appreciate that. And as always everyone, you can reach out to me at any time. If you have any Railroad Retirement questions here to help you and also everyone, please stay safe, stay on track and take care. So long everybody. Bye.
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