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Can I Retire Securely by Saving Only in an IRA?

edited December 2019 in Off-Topic

Can I Retire Securely by Saving Only in an IRA?

IRAs have much lower contribution limits than 401(k)s -- but are they enough to count on for retirement?

Maurie Backman

Dec 29, 2019

There's a reason 401(k) plans are regarded as a valuable retirement savings tool: Their generous annual contribution limits make it feasible for workers to retire with more than enough money to live on for decades.


  • edited December 2019
    Call me a heretic, but I'm coming to believe that IRAs are a bleeping joke. Why do I say that?

    < begin rant >

    1) In corporate 40X accounts you can save 18K+ in a taxfree account but only 6K annually in an IRA? If they made the IRA contributions to be the same as a 40X account, I'd feel differently. But 40X accounts have legions of annuity/fund companies and lobbyists driving companies/laws to support such accounts while IRAs languish with 1980s-era contribution limits b/c IRAs tend to be self-directed & don't often require 'expert' advice or specialized products and administration.

    2) Roth IRA phase-out limits on income are a joke. They penalize people who may be high-earners who want to tuck away something else for retirement while they are indeed making the $$ to tuck away .... ie, consultants or in jobs that high-income levels are variable. Thus, even if one wants to be responsible and tuck away extra money while they are very comfortably able to contribute more than they normally would, the IRA, Roth or otherwise, only allows someone to contribute a 'drip' of money each year. (Admittedly this is a 'good problem' to have if you're a high earner)

    3) Roth 5-year conversion timelines need to be better publicized. Folks talk about conversions -- even for high earners doing a 'taxfree' conversion of 6K each year into a Roth -- but if you ever need to take $$ out, you have to contend with multiple 5-year-clocks controlling how much principal you can remove w/o penalty.

    4) I think IRA calculators that project 7% (or even 5%) growth rates of that annual 6K are going to fall short in providing what a person needs for retirement if that's to be their only source of retirement income.

    5) US retirement accounts have too many rules, regulations, restrictions, limitations, paperwork, and arbitrary if-then-else conditions to make them a) useful, b) agile, and c) understandable to anyone but CPAs. (Oh wait ... CPAs like complicated tax codes, b/c only they can translate them for paying clients!)

    Looking into the future I would be more inclined to stick with taxable accounts for my retirement planning, and only use my 40X from work as a taxfree account to receive taxfree growth contributions at. In fact, the majority of my retirement accounts are taxable anyway.

    That said, I agree that IRAs/Roths are better than nothing for many people who otherwise wouldn't have anything. I'm just speaking from my position as a mid-career person who's managed his own investments for decades and thinks that for some slices of society, things are made needlessly complicated and limiting for no good reason.

  • beebee
    edited December 2019
    @rforno @johnN

    Never understood why the "catch-up" provision (for those over 50) was never indexed for inflation:
    The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000.
    Also, if we really want workers to save for retirement why not allow contributions to be caught -up over a window of time... multi-years?

    For example:
    IRA maximum contribution limits have increased over the years. They started in 1975 with a $1,500 limit from 1975-1981, $2,000 limit from 1982-2001, $3,000 limit from 2002-2004, $4,000 limit from 2005-2007, $5,000 limit from 2008-2012, and $5,500 limit from 2013-2018.
    Here's a novel thought:

    Based on inflation adjusted dollars, if an individual missed a year or under contributed in a year, I suggest that the rules let that individual (catch-up) by making missed contributions later in life (adjusted for inflation).

    I personally only started maxing out my contributions later in life after many other more important expenses were funded. At 50, I had the ability to save more for retirement, but the $1,000 catch-up didn't really address the issue that I missed out on "maxing out" my allowable contribution from age 25 - 50.

    The catch -up provision should be a calculation of missed contributions which are adjusted for inflation. For example, if I missed contributing from age 25-50 and I am now 50 (qualifying me for the catch-up provision) I should be able to fully contribute those missed contributions:

    At today's IRA contribution rates that would look like this:

    25 * $6000 = $150,000

    Using 40X limits would be even larger:

    25 * 19,500 = $487,500

    Think about it, if an individual at 50 wanted to get serious about saving they could get "caught - up" in a meaningful way.
  • edited December 2019
    Starting with $6000 and adding $500/month at 5% annual compounding a person could end up with $1,012,000 after 45 years. At 6% it would be $1,359,000. These amounts do not account for adding the $1000 catch-up. I believe it could be done but a taxable account may need to be started as well.
  • edited December 2019
    YES. (But you need to first read Peter Lynch’s books): “... Gov. Romney’s IRA account success was a result of him investing in what he knew.”
  • From Investopedia:
    "The same contribution limits apply as for regular IRA and 401(k) plans. In 2019 (and again in 2020), the maximum IRA contribution is $6,000, plus a $1,000 catch-up for those age 50 or above. The maximum for 401(k) plans is $19,000 (and $19,500 in 2020), plus a $1,000 catch-up."

    I have never, ever understood the disparities shown above. In it's crudest, basic form it seems to be saying that if you are not fortunate enough to work for an enterprise with a 401k plan you don't have the right to contribute as much into tax-differed savings accounts. I further speculate that there's a vast majority of part-time workers out there that fall into that hole because the companies they work for only allow full-time workers access to their 401k plans. Not that part time workers have any leftover funds to contribute to an IRA anyway but why the restriction?

    +1 to rforno and bee for their comments as well
  • Here's a radical thought: Instead of focusing on how tax breaks for retirement ostensibly for the masses are limited, we could look at why those tax breaks exist, and who really benefits from them.

    Nearly half of all families have no retirement savings at all. Of those who do, barely half max out traditional IRAs and not quite 2/5 max out Roths. So we're talking about, at most, 1/4 of families that might take advantage of higher limits. Are these the families that need the tax breaks? For that matter, are tax breaks the best way to spur retirement savings, since tax breaks disproportionately benefit those least likely to need them, i.e. those making enough to be in higher tax brackets.
    For many groups—lower-income, black, Hispanic, non-college-educated, and unmarried Americans—the typical working-age family or individual has no savings at all in retirement accounts, and for those that do have savings, the median balances in retirement accounts are very low (Figures 9–15).
    The State of American Retirement, Economic Policy Institute (March 3, 2016). Figure 9, embedded at the bottom of this post, shows that only 52% of families in the middle quintile (i.e. the middle of the middle) have any retirement savings - including IRAs, 401(k), etc.

    ICI 2018 profiles of IRA investors in Traditional IRAs and in Roth IRAs are the source of the participation numbers (search for "maximum" in the reports).

    @rforno speculates that the limits for employer sponsored plans are higher than for IRAs because of lobbying. @Mark simply does not understand the disparity. To some degree, I instinctively agree, adding the observation that IRAs seem to have been introduced in 1974 as a sop to ordinary workers. They often had no other retirement options, unlike doctors and lawyers who had had Keoghs since 1962 along with higher contribution limits.

    But there is another explanation, based on public policy:
    One reason that public policy generally allows higher contributions to thrift and salary reduction plans may be that these employer plans are subject to nondiscrimination rules. The rules require that contributions by and on behalf of lower-paid employees must not fall too far below contributions for higher-paid employees. Employer matching contributions serve as inducements to attract sufficient saving from the lower-paid to meet the nondiscrimination rules. In this way, salary reduction and thrift plans may induce more savings from lower-paid employees than IRAs do, thus reducing the number who save too little.
    Tax policy for Pensions and Other Retirement Savings, CBO (April 1987).

    Which brings us back to the questions of why these tax breaks exist and who is or should be benefiting from them.

    @bee doesn't understand why catch up provisions are not indexed for inflation. The absence of automatic indexing doesn't mean that adjustments aren't made (see, e.g. SS before COLA became automatic). Be careful what you wish for.

    The catch up provision was introduced in 2002. It was $500 then. Using January CPI-U figures for 2002 and 2019 (arbitrary month on my part), we get an inflation adjustment of 251.712/177.1. That's a multiplier of about 1.42. So adjusted for inflation, the catch up provision should be about $700. It's $1000. Are you sure you'd prefer having COLA adjustments?

    Finally, if you think IRA rules are complicated now, take a look at the rules in, say, 1998. That's when you had a one-time chance to do a Roth conversion and spread out the taxes over four years. That's before the RMD rules were simplified (really!) in 2002. That's before the Secure Act got rid of a half-year RMD age requirement (changing 70½ to 72). And realistically, most people (80%) aren't even affected by RMDs since they take more than required. Which once again leads us back to the question: which people are we really talking about here?

  • Mark said:

    I further speculate that there's a vast majority of part-time workers out there that fall into that hole because the companies they work for only allow full-time workers access to their 401k plans. Not that part time workers have any leftover funds to contribute to an IRA anyway but why the restriction?

    Fixed (at least significantly). SECURE Act.

  • @msf - thanks for the linked info re: SECURE Act. I overlooked that in my reading of the Act originally.
  • edited December 2019
    "Can I Retire Securely by Saving Only in an IRA?"

    No. Social Security plus significant additional savings are required.
  • The median personal income in the United States according to the St. Louis Fed was $33,706 in 2018. Such a person could contribute 17.8% of their income annually (more if over age 50) while staying below IRA contribution limits.

    Fidelity (@15%) thinks this is enough. Studies by the Boston College Center for Retirement Research (@10%) and by Aon Hewitt (@17%), both discussed in this Stanford report on Saving for Retirement, concur.
  • hank said:

    YES. (But you need to first read Peter Lynch’s books): “... Gov. Romney’s IRA account success was a result of him investing in what he knew.”

    Well... not exactly. That page is a pitch for self directed IRAs.

    It is true, as stated on that page, that "the tax treatment for Romney’s IRA 'is the same for Gov. Romney as it is for every citizen of the U.S.'" But what isn't the same for every taxpayer is the ability to manipulate valuations to their benefit.

    You may recall news items about Trump keeping two sets of books - giving high valuations on assets for loan purposes and low valuations for tax purposes. While keeping multiple sets of books may not be legal, there is a lot of flexibility in valuing some types of assets. Not ones you or I might own, but ones someone like Romney would.

    “'One possibility for its size is that he put his Bain partnership interests into the IRA and valued them at a very low number,' said David Weisbach, a law professor who focuses on tax at the University of Chicago Law School."

  • edited December 2019
    People making $33,706 a year will never have the ability to save 15-17.8% and still pay their bills. Saving 5-10% would be a hell of an achievement IMHO. So with that, Fidelity answered the question, NO.
  • I agree with you, especially for people caught between raising families, paying off student debt and caring for elderly parents.

    That's the point. It's not the typical middle class wage earner who is constrained by contribution limits. Growing up I was constantly amazed at how my grandmother managed to survive on little more than a meager SS check. Certainly rent control played a part and my mother helped, but it's not an easy way to live out one's life.
  • rforno, that was post of the year.

    Education starting in middle/high school would go a long way towards getting kids to have an understanding about investing. The other problem that’s been partially solved by more companies is automatically opting employees into these retirement plans.

    It’s hard to take the initiative, but I believe almost anyone, no matter their situation, can find a way to set aside a little something each month. Really helps if saving becomes a hobby, but that’s few and far between.
  • Agree @msf. Not how anyone wants to live out their life but likely how most will, given the savings numbers I see and the political bent to protect the rich (not political, just the facts). Thanks for all your analysis and information.
  • I wont be too long before those scum in the government go after the Roths- excuse me, but Im disgusted with so called Secure Act- they re coming, and theyre coming on strong- Democrats?Republicans? Dont make me laugh- there s a difference??
  • @BennyB, just curious, what item of the Secure Act disgusts you the most? Everything I see on the list below I think is a good or at least a fair thing for IRA investors.

    1. Eliminates the age limit for making traditional IRA contributions.
    2. Increases the RMD age from age 70 ½ to age 72 for all retirement accounts subject to Required Minimum Distributions (RMDs).
    3. Allows penalty-free withdrawals for birth or adoption, but the distribution is still taxable.
    4. Eliminates the “Stretch IRA” by mandating inherited IRAs, for non-spouse beneficiaries, be withdrawn and taxes paid within 10 years.
    5. Encourages employer-based plans to offer annuities in their plan by providing liability protection for offering annuities.
    6. Allows Taxable non-tuition fellowship and stipend payments to be treated as compensation to qualify for an IRA or Roth IRA contribution.
  • The idea that you HAVE to take-that is one s heirs- in 10 years rather than stretching out the heir lifetime- for example my nephew is only 14 and Im over 70- guess I went a little overboard huh??annuitees are no treasure either- 4 and 5 are the most disgusting in my humble opinion of course- lol
  • edited January 2020
    I can appreciate you wanting extra benefits for your nephew, but in general I don't think it's fair to all tax payers that people are able to to pass on tax free money to beneficiaries without tax consequences. That's tax deferred money specifically for the savers retirement. Always has been since 401k's and IRA's were established. Deferred to me means taxes need to be paid back by the saver at some point in their life time, or if not by the saver than their estate, asap. Just my 2 cents.

  • I understand the Roth IRA rules differently, and why Roths were set up/w hatever happenned to leaving something to beloved heirs?
  • its been going on for centuries
  • ...whatever happenned to leaving something to beloved heirs?
    @BennyB, not a thing. But what does that have to do with paying your fair share of taxes, even after your dead? If you don't you are essentially screwing the system which ends up screwing the rest of us tax payers. Deferred accounts were never meant to hide tax money or be an estate planning tool.

    If you are speaking of leaving a Roth for inheritance, what I read is Roth's are now the preferred option over IRAs and 401k's for leaving an inheritance. Here is a Forbes article that says Roths are even a better option with the new laws.

  • Stupid Question. If one makes $100K / year, one can contribute $15K to 401k regardless of any employer match. So WTF is there a law which says you cannot contribute $15K to IRA if you earned $100K much as self-employed ??? Does anyone think one is going to fake a higher income just to be able to contribute more to IRA?

    Makes no freakin' sense.
  • @MikeM
    You noted: "If you are speaking of leaving a Roth for inheritance, what I read is Roth's are now the preferred option over IRAs and 401k's for leaving an inheritance."
    The problem being is that the overwhelming number of individual investors (if they have enough left over income) have a 401k, 403b and if they have enough other money to support their families, they may indeed invest in the much lower $ limits of a Roth, or only invest in a Roth and skip the 401k or 403b and lose a possible match.
    NOW, the inheritance path becomes keep investing in the 401k/403b and begin Roth conversions that will require other outside cash to pay the tax requirements on the Roth conversions.
    So, the tax man arrives, regardless; and the remaining balance to pass as inheritance to a non-spouse is a much lesser amount.
    I suppose I could find satisfaction with the stretch IRA change and understand those who consider this as tax evasion, IF !!!!!!!!!; I was fully assured that forms of tax evasion and generation skipping for inheritance was not taking place with the very wealthy. I'm not going to dig for proof as I don't have enough time left on this rock.
    So, this "tax break/evasion" that was available for many in the middle class is to a lesser time frame than previous, from the SECURE ACT provision, which was first mentioned here in June, 2019.

    c'est la vie, c'est tout

    Good Evening,
  • @catch22, let me repeat, tax deferred accounts were never meant to be inheritance vehicles. They are for YOUR and your spouse's retirement!. If people, mainly the rich, have been using loop-holes to hand off inheritance tax benefits to heirs, it is about time those loop holes are being closed. You may not like the term, but it is or has been legal tax evasion.
  • msf
    edited January 2020
    Decades ago, Congress started out with virtually no laws on retirement (including no SS). It gradually put laws into place with multiple objectives: helping people save for and live in retirement, doing that somewhat equally across the population, and containing costs to the national fisc. (It's that third one that often conflicts with and confounds the first.)

    Some companies already had thrift plans. Congress put laws into place that formalized their tax treatment. Later, through ERISA it put in rules that employer plans be funded to protect participants. It put in rules to ensure that the hoi polloi got a fair deal: that the better off didn't get the lion's share of Congress' largesse or use these benefits to aggregate their wealth, especially with respect to estates.

    To that end, fairness tests were put in. Highly compensated employees (HCEs) would not be able to contribute the legal max if other employees weren't contributing much. Employers were allowed to match contributions to encourage participation (which in turn enabled HCEs to contribute more because others were as well).

    Caps were set. In part they helped contain costs by limiting tax benefits to those who least needed them. In part they helped ensure that a reasonable fraction of of the benefits went to typical workers.

    IRAs don't have all the tests and other mechanisms to promote fairness and participation. All they've got are caps. So these are used more aggressively. Even with their lower limits, fewer than 1/4 of individuals max out (a figure I previously documented).

    These are all rules to help save for retirement. Nothing that impedes people from saving for their kids on their own. They just don't get special treatment.

    There is a public interest in promoting saving for retirement. We want to keep people, especially retirees, off the dole. So Congress crafts laws accordingly. What is the public interest in giving heirs special tax breaks?
  • There is a public interest in promoting saving for retirement. We want to keep people, especially retirees, off the dole. So Congress crafts laws accordingly. What is the public interest in giving heirs special tax breaks?
    @msf, +++1
  • Mike M- I never avoided tax in my life/Sorry you cant see my point of view
    .. Here in USA, all are entitled to their points of view/ Prediction? They ll tax Roth accounts next, regardless who gets the money/ Let us have peace
  • edited January 2020
    Well, I'm on board with you guys on this one, that's for sure. I fully realize that there are certain situations involving taxes that may be in need of clarification, or that may result in uneven or potentially unfair treatment. Those issues should certainly be dealt with.

    But I really resent the mind-set of those individuals, some of whom post here, who seem to strive for nothing less than complete tax avoidance. If you want to live in this country, use it's services, and enjoy it's advantages, then you should damn well be willing to help pay for running the place.

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