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You miss my point. What I'm saying is that the IRA contribution rules assume a person will always be at or greater than their present salary levels -- which is not always the case.
Let's say you're self employed with an IRA which you contribute to diligently. Suppose you have some extra $$ lying around to throw into your IRA this year b/c you had an amazing year as a consultant but you can't b/c of various contribution limits....you can't contribute more than 5500 and certainly nowhere near the 18K you can for a company-sponsored 40X account. Suppose 2 years later you are not making the same amount of $$ so you can't comfortably contribute -- if at all.
At the very least, increase the contribution limits for IRAs to be what they are for 40X accounts so that you have a greater cushion in retirement.
the pathetically low annual contribution limits on these accounts are not enough vs the 18K on an employer's 40X plan, and likely will NOT serve as a significant amount of retirement income for people, even as a SS suppliment.
If you make enough money to max out your 401(k) and IRA contributions, you will have no problem retiring comfortably. That should be plenty of money to live off of. Must feel good to have money bags sitting around everywhere.
Self employed people are allowed to contribute $18K (plus catch up if over age 50), plus 20% of their remaining income, up to $54K to an individual 401K plan. Rather than being subject to various low contribution limits ("5500 and nowhere near 18K"), the self employed individual actually has the ability to throw tons of money at a qualified plan, especially if one "had an amazing year as a consultant".
Perhaps you are homing in on the self employed because their income tends to be more erratic. A steady wage W2 employee would be less likely to fit the hypothetical of someone earning lots of money one year (but be subject to contribution limits) while earning less another year (and so be able to contribute less because of finances, not because of legal contribution limits).
Still, lets work with that hypothetical. Say a worker gets a huge bonus, but isn't able to contribute it all to tax sheltered plans because of legal contribution limits. So the worker is "stuck" with that extra cash sitting around in a taxable account.
We suppose that two years later, the employer is having difficulties, implements forced vacations, reduces the worker's pay. So much so that the worker can just barely make ends meet with that smaller income stream. The worker would like to see money going into a tax-sheltered plan, but he can't comfortably contribute from that income stream.
The worker looks around, sees a taxable account, and thinks to himself: Why don't I just move this money to a Roth? If things get really tight, I can tap it at no cost, and meanwhile all the earnings are tax free.
Under the hypothetical of having too much income one year to contribute all of it, and not enough income a subsequent year to have the resources to contribute at all, a simple solution is to use the excess from the previous year as the source of the later contribution. Problem solved, no changes in the law required.
@MSF that's a fair assessment. That said I do wonder how many people do self-employed 401X accounts instead of IRAs .... or even know about them? I bet most people assume that 401X accounts are only available to employees of 'big businesses' and not self-employed or small businesses. Maybe. (shrug)
@MSF great math and great points. Right now I'm mostly making contributions to a tax-deferred solo 401K, rather than prepaying taxes, since I expect in retirement to 1) have less income 2) live in a lower or no tax state (I'm in NY now.) So my individual tax rate should be lower.
I also wonder if in 20 or so years, when I hopefully retire, the government won't find some way to tax supposedly exempt income. So maybe it makes sense to take the tax benefit now, so to speak.
@rforno >> the IRA contribution rules assume a person will always be at or greater than their present salary levels
Huh? I did not see that or think of it that way back when my on-staff salary was declining, nor when I was self-employed and my income was up and down. Maybe it's different now, and worse?
Comments
If you have money bags everywhere, you ain't reading MFO.
Let's say you're self employed with an IRA which you contribute to diligently. Suppose you have some extra $$ lying around to throw into your IRA this year b/c you had an amazing year as a consultant but you can't b/c of various contribution limits....you can't contribute more than 5500 and certainly nowhere near the 18K you can for a company-sponsored 40X account. Suppose 2 years later you are not making the same amount of $$ so you can't comfortably contribute -- if at all.
At the very least, increase the contribution limits for IRAs to be what they are for 40X accounts so that you have a greater cushion in retirement.
Perhaps you are homing in on the self employed because their income tends to be more erratic. A steady wage W2 employee would be less likely to fit the hypothetical of someone earning lots of money one year (but be subject to contribution limits) while earning less another year (and so be able to contribute less because of finances, not because of legal contribution limits).
Still, lets work with that hypothetical. Say a worker gets a huge bonus, but isn't able to contribute it all to tax sheltered plans because of legal contribution limits. So the worker is "stuck" with that extra cash sitting around in a taxable account.
We suppose that two years later, the employer is having difficulties, implements forced vacations, reduces the worker's pay. So much so that the worker can just barely make ends meet with that smaller income stream. The worker would like to see money going into a tax-sheltered plan, but he can't comfortably contribute from that income stream.
The worker looks around, sees a taxable account, and thinks to himself: Why don't I just move this money to a Roth? If things get really tight, I can tap it at no cost, and meanwhile all the earnings are tax free.
Under the hypothetical of having too much income one year to contribute all of it, and not enough income a subsequent year to have the resources to contribute at all, a simple solution is to use the excess from the previous year as the source of the later contribution. Problem solved, no changes in the law required.
@MSF that's a fair assessment. That said I do wonder how many people do self-employed 401X accounts instead of IRAs .... or even know about them? I bet most people assume that 401X accounts are only available to employees of 'big businesses' and not self-employed or small businesses. Maybe. (shrug)
I also wonder if in 20 or so years, when I hopefully retire, the government won't find some way to tax supposedly exempt income. So maybe it makes sense to take the tax benefit now, so to speak.
>> the IRA contribution rules assume a person will always be at or greater than their present salary levels
Huh? I did not see that or think of it that way back when my on-staff salary was declining, nor when I was self-employed and my income was up and down. Maybe it's different now, and worse?