Is Joe Biden or Donald Trump Better for Your 401(k)?

Trump-Biden last debate
"Your 401(k)s will go to hell," if Joe Biden gets elected, said President Donald Trump at the last debate on October 22. Was he right? Photo by Morry Gash-Pool/Getty Images

In his closing statement at last week's final debate with former VP Joe Biden, President Donald Trump made it clear who he thinks retirement savers ought to be rooting—and voting—for. "If he gets in, you will have a depression the likes of which you have never seen," Trump warned about his Democratic rival for the White House. "Your 401(k)s will go to hell."

So far this year, the 43 percent of Americans who participate in retirement savings plans at work have already been to hell, back and halfway there again, it seems, as the pandemic took stock prices on a wild roller coaster ride. By the end of the first quarter of 2020, the average 401(k) balance was down 19 percent, according to Fidelity Investments, only to rebound 14 percent over the following three months. More ups and downs followed and, despite the Dow dropping about 1,800 points through the first three trading days of the final full week before the election, stock prices for the year to date are now basically flat.

Which candidate is more likely as president to get the market back on a winning track, though, is only part of figuring out whether Trump or Biden would be better for your 401(k). Also important: what moves the next president might make that would affect the tax breaks savers get from Uncle Sam for socking away money in these accounts. Only Biden has come out with proposals specific to workplace retirement plans but Trump's second-term plans for his first-term income tax cuts, currently due to expire in 2025, could also impact anyone with a 401(k).

Here's how the candidates' plans for retirement savers shake out.

Who Offers the Biggest Tax Breaks

Despite some scary sounding headlines in the financial press—"Joe Biden Will End Your Retirement Plan As You Know It," a recent one proclaimed—the proposed changes to 401(k) plans announced by the Democrat last month are pretty modest. The centerpiece: making the tax break you get for contributing to a workplace plan a credit instead of a deduction. The goal? To grant larger tax benefits to lower- and middle-income earners so they'll be encouraged to save more for retirement.

As the benefit works now, your contributions to a 401(k) reduce your taxable income by $1 for every dollar you put into the account, up to an annual limit of $19,500 in 2020 and 2021 (savers 50 and older can kick in an additional $6,500). The higher your tax bracket, the more money you save in taxes on that contribution. For example, a person in the highest 37 percent tax bracket now saves $37 in taxes for every $100 contributed to a 401(k); in the lowest 10 percent bracket, that same $100 contribution saves only $10 in taxes.

A tax credit, on the other hand, directly lowers your tax bill, dollar for dollar—and is worth the same amount no matter how much you earn. The Biden camp has not specifically spelled out how much its proposed new credit would be worth, but estimates from the Tax Policy Center and other experts suggest it will likely be a 26 percent credit for each dollar contributed, based on the Democrat saying the plan should be revenue neutral and not cost the government any additional money compared to current law. An employee who contributes, say, $10,000 a year to a 401(k) under this plan would save $2,600 in federal income taxes.

If Biden makes the credit refundable, you would get the full credit, even if you owe less than that amount in taxes. The "extra" money would come back to you in the form of a tax refund.

"In effect, the proposal provides a new benefit to taxpayers in lower-income tax brackets, while providing slightly worse treatment for higher earners," says Garrett Watson, a senior policy analyst at the right-leaning Tax Foundation. For example, he calculates that a worker who earns $40,000 a year and makes an average 401(k) contribution equal to 9 percent of his salary would save an additional $392 in taxes under the Biden plan compared to current law. Someone making $80,000 with the same retirement contribution rate, by contrast, would save about $124 less in taxes than under the system in place today, according to Watson.

That this comparatively worse treatment doesn't just apply to the very wealthy is considered a central drawback to the idea. Joint filers with earnings above $80,250 or single filers with earnings above $40,125—that is, anyone in the 22 percent tax bracket or higher—would lose some of the value of traditional accounts when compared to current law, says Watson. As a result, some experts suggest Biden may forego his revenue-neutral aim and make the credit worth more than 26 percent to enhance the benefit for taxpayers in the middle brackets.

One other change Biden is proposing: The former vice president wants to expand Americans' access to retirement accounts by automatically enrolling workers without a pension or 401(k) plan through work—roughly half of all non-government employees—in a government-sponsored IRA. He also wants to encourage small businesses to provide 401(k) plans to their employees by offering them tax credits to help offset the costs of running workplace retirement plans.

Unlike Biden, Trump has not released any second-term tax proposals. White House budgets for fiscal years 2019-2021, do, however, assume that the income tax rates Trump lowered in 2017, which are due to expire in 2025, will become permanent, says Eric Toder, institute fellow and co-director of the Tax Policy Center. The net effect of lower rates is to make the income tax break you get for contributing to your 401(k) slightly less valuable than it would be otherwise.

In addition, while Trump has no new proposals to expand the availability of retirement accounts, he did make several changes through last year's SECURE Act, which took effect this year. Among them: repealing the maximum age for traditional IRA contributions; raising the age for taking required minimum distributions from retirement accounts; and providing tax credits to businesses that begin offering retirement plans or new auto-enrollment features for existing plans.

Who Will Be Best For the Stock Market

In addition to the income tax savings 401(k)s can provide, gains on your investments in the plan grow tax free; you don't owe any money to Uncle Sam until you withdraw money from the account after retirement. The bigger the gains, the bigger the multiplier effect on your savings.

Will Biden or Trump power the market to higher profits for retirement investors? An analysis of the economic policies proposed by both candidates by the debt-rating agency Moody's gave the edge to Biden. It concluded that if Democrats sweep the White House and both houses of Congress, the economy will grow 4.2 percent a year, on average, over the next four years, compared with a more modest 3.1 percent annual increase if a Republican president and Congress are elected. If Congress remains split between a Democratic house and GOP Senate, the forecast was a lot closer: Moody's estimated a Biden presidency would lead to 3.5 percent annual GDP growth over the next four years vs. 3.2 percent growth under a second Trump term.

The majority of studies, including one by research group Oxford Economics and the budget model from the University of Pennsylvania Wharton School of Business, side with Moody's general conclusion that Biden's overall legislative plan would stimulate greater economic and job growth than the current trajectory under Trump. Most, not all: The Tax Foundation predicts the economy will shrink by 1.6 percent in the long run with a Biden win.

Such generally positive findings for Biden align with what has, at least, historically proven true: Economic performance has been stronger under Democratic presidents than Republican presidents.

The economy has expanded 3.6 percent annually under Democrat leadership, on average, compared to 2.6 percent for Republicans since 1947, according to the U.K. investment bank Liberum. It's the same story for stock market performance. Over the same time period, the S&P 500 posted an average annual return of 10.8 percent when a Democrat was president vs. 5.6 percent under Republican presidents. Liberum even ran an analysis excluding the Great Recession of 2008 and the COVID-19 panic sell-off from this spring, both of which occurred during Republican presidencies, but the trend remained the same.

Bob French, director of investment analysis at Retirement Researcher, went a step further, reviewing S&P returns dating back to 1926. The difference in gains between the two parties remained around five percentage points, although the overall returns were better: The average annual return for the S&P 500 was 9.1 percent under Republican presidents and 14.9 percent under Democratic presidents.

But French warns that historical performance isn't the soundest predictor of the future. After all, party affiliation provides a very rough guide to how a person will actually govern and Biden and Trump bear little resemblance to the leaders of their respective parties from nearly 90 years ago.

Additionally, every new Oval Office tenant faces unique challenges that could lead them to buck the trend of their predecessors. For instance, the two presidents who have overseen the largest stock market expansions during their tenure, Calvin Coolidge and Gerald Ford, were both Republicans, "so you need to take all of this with a grain of salt," adds French.

"Presidents don't really have as much impact on the economy and stock market as people try and give them credit for," says French. "The president may be the most powerful person, and certainly does have more control than the average person on the stock market, but that doesn't mean they have that much control. To a very large degree, the markets are going to do what they're going to do."

Finally, the length of a President's time in office, be it four or eight years, just isn't that long in terms of the overall duration of your retirement investing, which will likely span several decades, "to be the driver of what your retirement will look like," says French.

In the end, the person with the greatest impact on your retirement savings is you. How much you sock away in the account and how you invest those funds will have a far greater impact on the size of your nest egg than whoever happened to be elected president—in 2020 or any other year, for that matter.

Kerri Anne Renzulli is personal finance journalist based in London; she's written for Money, Financial Planning magazine and CNBC.

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