https://www.fool.com/retirement/2019/12/29/can-i-retire-securely-by-saving-only-in-an-ira.aspxCan 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.
Comments
< 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.
Never understood why the "catch-up" provision (for those over 50) was never indexed for inflation: 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: 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.
https://sdirahandbook.com/self-directed-ira-news/how-to-have-a-20-million-ira-like-mitt-romney-self-direct-it-and-invest-in-what-you-know/
"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
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. 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: 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?
https://humaninterest.com/blog/part-time-employees-secure-act/
No. Social Security plus significant additional savings are required.
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.
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."
https://www.reuters.com/article/us-usa-campaign-romney-ira/how-did-romneys-ira-grow-so-big-idUSTRE80N04E20120124
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.
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.
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.
https://www.fedsmith.com/2020/01/02/6-key-retirement-changes-of-the-secure-act/
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.
https://www.forbes.com/sites/leonlabrecque/2019/12/23/the-new-secure-act-will-make-roth-strategies-much-more-appealing-here-are-five-ways-to-use-a-roth/#db5d42f381d1
Makes no freakin' sense.
+1 !
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,
Catch
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?
.. 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
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.