4 things to keep watching in 2021

There's a lot still up in the air in these key personal finance areas.

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Key takeaways

  • With the conclusion of the 2020 election season, we know the balance of power, but there are still lots of unknowns.
  • A new stimulus package went through, but the full scope of other initiatives has yet to be determined.
  • The stock market has priced in a full recovery in 2021, but there could be volatility depending on government action and the trajectory of the COVID-19 pandemic.
  • Tax changes are likely, but the scope will be curtailed by the slim Democratic majority in Congress.
  • Changes to retirement laws may be a bipartisan initiative early in 2021.
  • The future of the Affordable Care Act is in the hands of the Supreme Court, but Congress will likely take interim actions to strengthen the law this year.

As the Biden administration settles in, we are in a new political era that will shape our financial futures. Congress passed a broad economic stimulus package in March with the American Rescue Plan Act, and there are more initiatives on the way. We now know the basic outlines of what changes may happen in the coming months that affect key personal finance areas, but there are still a lot of unknowns.

What moves from proposal to legislation is constrained by the Democrats’ slim majorities in both Houses of Congress. That balance of power will likely limit the scope of the Democrats’ agenda across taxes, investing, retirement and health care.

Another big question mark is the continued trajectory of the economic recovery. The vaccine is rolling out quickly now, but we don’t know what further actions the government may take in terms of additional stimulus, tax law changes, monetary policy, trade agreements, climate change initiatives, international accords, and regulations. There are also big concerns about what will happen with markets, inflation, and interest rates if the economy overheats.

Depending on your personal financial situation, you may want to keep track of how these 4 key situations develop:

1. Taxes

With the $1.9 trillion third stimulus bill all done, Congress is now taking up President Biden’s infrastructure reform proposal, which has a wide array of targets—from bridges and roads to rural broadband access. The package comes bundled with tax changes, notably an increase in the corporate tax rate to 28% from its current 21%.

The Biden administration has signaled that the infrastructure bill will be followed by a second package centered around “human infrastructure” that will focus more on social programs, jobs, racial justice, and other topics. This is where changes to personal taxes may come into play, such as increasing the top rate to 39.6% from its current 37% for those earning over $400,000, the details of which have still not been determined.

"The greatest alignment for increases among Democrats is to raise the corporate tax rate and the individual marginal rates for the highest income earners making over $400,000, as well as investment taxes and the treatment of capital gains at death," says Jim Febeo, senior vice president, head of federal government relations at Fidelity.

With narrow Democratic majorities in Congress, there could be many checks on what tax changes actually make it into law, and when. Most likely, any changes will have to go through the budget reconciliation process, affecting the 2022 tax year, which would be filed in April 2023.

“It will take some time for Congress to negotiate a major package, meaning if something passes you probably won't see new rates take effect until tax year 2022, though capital gains and dividend rate changes could go into effect sooner,” says Febeo.

2. Investments

The stock market has priced in a full recovery in 2021, but there are still concerns worldwide about COVID-19 surges and inflation. While there are no forecasts for a severe stock market dip like we saw in March 2020 when the world economy shut down, there still could be shifts in certain sectors ahead that investors would want to note.

For Fidelity’s Jurrien Timmer, head of global macro at Fidelity, the rotation from a cycle that favors growth stocks to one that favors value stocks, and from large-cap to small-cap stocks, happened right on schedule as a result of the regime change.

Now the $64,000 question is if this could be a very long-term trend rather than a shorter-term rotation.

The answer for that will depend on how the rebound continues. If you think of the economy as being at 100% (of capacity) in February 2020, then plunging down to 20% or 30% that March, it then recovered back to 70% this past fall. As we are still not at 100%, the question is how quickly or slowly we can get back full speed and how the market responds to the length of time it takes for that to happen.

Fidelity experts think that stocks in the key sectors of technology, energy, financials, and health care are likely to benefit from the balance of political power in Washington. Even with the Democrats gaining control of the Senate, the coalition is broad, and the majority is slim, which could keep a check on the scale of change.

3. Retirement

There were a lot of changes to retirement planning in 2020, mostly because of the SECURE Act, which passed with bipartisan support. There were also provisions in recent pandemic relief bills that temporarily altered rules for retirement withdrawals.

Given the bipartisan nature lately of retirement reform, a retirement bill with further enhancements could emerge in 2021. Provisions could include such things as raising the age for required minimum distributions to 75, indexing catch-up contributions for inflation, and adding additional catch-up options for those over 60.

"There will be a strong effort to move it, but it has to be attached to a larger must-pass measure to get through, so it could take some time to come to fruition," says Andy Vermilye, vice president of public policy at Fidelity.

4. Health care

Joe Biden ran a big part of his campaign on improving the Affordable Care Act, but for at least the first part of 2021, health care policy is ostensibly about fighting COVID-19, rolling out the vaccine distribution, and getting the economy back to normal. The ACA is also currently being reviewed by the Supreme Court, and a decision could come by summer. But already, the American Rescue Plan Act expanded ACA eligibility and increased subsidies at certain income levels, changes that will be in effect for 2 years. More may be coming in the "human infrastructure" part of Biden’s proposals.

"I'd put the odds of the Supreme Court overturning the whole ACA pretty low. From that point, it’s then a matter of what the government can do administratively through the Health and Human Services Department and through current law," says Febeo. For instance, the Biden administration may undo many recent actions taken, some as simple as widening the open enrollment period that former President Trump narrowed.

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