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Financial Planning Under the Biden Administration

Financial advisers and their clients should look ahead to possible changes for 401(k)s, estate planning, capital gains and 2021 market implications.

The election is over, Joe Biden is the president-elect and party control of the Senate will be decided in January, with two runoffs in Georgia. Investors and financial advisers are looking at what the new administration, new legislation and the effects of the pandemic mean for the economy and the financial markets in 2021.

In light of this, what should financial advisers consider in developing strategies for their clients in the coming year?

A Long-Term Perspective

Every client’s situation is different and calls for unique guidance and advice. It generally makes sense to focus on a client’s long-term financial planning situation rather than to react to political events.

With a new administration coming in, there has been much written about the Biden tax plan and other potential changes that could affect investors. While advisers must be aware of these and the potential impact on their clients should they become law, it’s important not to let your clients become distracted by any of these changes and lose focus on their overall situation.

That said, potential new rules for retirement plans, taxes and other areas are worth noting as they might impact some of the tactics you recommend to your clients as part of their overall financial planning strategy. Here are a few examples.

401(k) Investing

President-elect Biden is reported to be considering a new plan to change the way those who contribute to 401(k) plans receive a tax break for those contributions. Currently, retirement savers who contribute to a traditional 401(k) account do so on a pre-tax basis, the amount of their contributions are excluded from their taxable income for that year.

Under Biden’s plan, 401(k) participants would receive a tax credit calculated as a percentage of the amount contributed. A tax credit serves to directly reduce the amount of tax due. However, this approach would result in a lower overall tax benefit for higher income 401(k) participants.

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While there is nothing to do now, if this does come to pass, advisers will want to review the 401(k) options for any clients who are impacted. It might make sense to consider a designated Roth option for those clients whose employers offer this option. For those clients who are small business owners, this might impact the type of plan they offer for their employees and for their own use.

Estate Planning

The estate tax exemption for 2021 was just announced and it has increased to a record high amount of $11.7 million per person. Under the current tax rules, the personal exemption amount is scheduled to revert back to $5 million in 2026, indexed for inflation. President-elect Biden has proposed reducing it even further to $3.5 million per person.

While we don’t know with any certainty what will happen, part of estate planning might involve accelerating gifts to ensure that they fall under the current personal exemption in place this year or over the next few years. Advisers will want to monitor developments here for higher net worth clients to be sure that they can make any moves that might be needed as changes to rules like this are sometimes made retroactive the beginning of the year in which they are enacted.

Capital Gains

There has been some discussion around an increase in the capital gains tax as part of Biden’s proposed tax plan. The proposal includes raising the long-term capital gains rate to 39% for those with incomes in excess of $1 million. The current top rate is 23.8% for higher income investors.

If this looks like it might become reality, some experts worry that this would cause a wave of selling of appreciated stock positions by many large investors looking to book capital gains subject to the current rates. This could trigger a market decline. That market decline could be a buying opportunity for some investors.

Advisers also will also want to review clients’ taxable holdings to determine if they should realize long-term capital gains on some of their investments before any potential tax rate change. A higher rate for capital gains taxes could also make using appreciated securities for charitable giving an even better option for those clients who are charitably inclined.

While there will undoubtedly be some changes in the tax rules and other areas under the new administration, overall the best advice for clients is to focus on the financial planning process. While it can be tempting to react to changes in specific areas, it's important to stay focused on the bigger picture.