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Learning, Sharing, and Teaching => Investor Alley => Topic started by: SummerLovin on November 25, 2015, 09:46:57 AM

Title: Why different contribution limits for IRA vs. Roth 401K?
Post by: SummerLovin on November 25, 2015, 09:46:57 AM
Just curious to know why the contribution limits are different today.  I understand that they are different plans that were set up at different times for different purposes, however it appears to leave those without 401k's at a significant disadvantage.
If the government wanted to avoid double dipping, why not just have a standard cap at 23k for either acct. or any combination of the two?
I've tried google, and searched this forum, but mainly on the differences, not necessarily why.  If this has been discussed previously kindly share the link.
Title: Re: Why different contribution limits for IRA vs. Roth 401K?
Post by: matchewed on November 25, 2015, 09:56:01 AM
You already answered your question.

I understand that they are different plans that were set up at different times for different purposes,


Given this, why should they have the same contribution limits?

Those without 401k's have a variety of different tools at their disposal, they could have pension, 403(b), 457(b)...etc.
Title: Re: Why different contribution limits for IRA vs. Roth 401K?
Post by: Cromacster on November 25, 2015, 10:03:35 AM
You already answered your question.

I understand that they are different plans that were set up at different times for different purposes,


Given this, why should they have the same contribution limits?

Those without 401k's have a variety of different tools at their disposal, they could have pension, 403(b), 457(b)...etc.

What about those without any of those options?  If you are a W-2 worker you are limited to an IRA and don't have many other options to reduce your taxes.

I am sorta on the same page as the OP.  When it comes to tax deductible savings I would prefer it to be detached from the employer.  Then the match would be paid out annually and allowed to be deposited into the IRA tax free.  I live in a wishful world though.
Title: Re: Why different contribution limits for IRA vs. Roth 401K?
Post by: matchewed on November 25, 2015, 10:16:16 AM
You already answered your question.

I understand that they are different plans that were set up at different times for different purposes,


Given this, why should they have the same contribution limits?

Those without 401k's have a variety of different tools at their disposal, they could have pension, 403(b), 457(b)...etc.

What about those without any of those options?  If you are a W-2 worker you are limited to an IRA and don't have many other options to reduce your taxes.

I am sorta on the same page as the OP.  When it comes to tax deductible savings I would prefer it to be detached from the employer.  Then the match would be paid out annually and allowed to be deposited into the IRA tax free.  I live in a wishful world though.

I'm not disagreeing with any of that. Eliminating both and just having a blanket system where an individual could save X amount for retirement would be great and make too much sense for our government to do. ;)

However given the question, why are they different, the answer was already there as I posted.

I'm also a huge fan of eliminating pension plans for a simplified system that relies on contributions from employer/employee where the limits are increased for those who do not get contributions from employer. KISS method and all that.

Easier to keep adjusting existing stuff than to scrap it all for some new thing. It's a path of least resistance issue for our government.
Title: Re: Why different contribution limits for IRA vs. Roth 401K?
Post by: seattlecyclone on November 25, 2015, 11:59:01 AM
Why the different limits? Because Congress said so. I'm not sure they really thought about it as a complete system. Someone proposed a bill allowing employer-based plans with a certain limit, and it passed. Later someone proposed a bill allowing individual accounts with a different limit, and it passed. You might ask why they didn't scrap the employer plans when they created IRAs, but I'm sure there were plenty of people and lobbyists who were attached enough to the employer plans that they didn't support eliminating them, so they just bolted IRAs on as an additional thing.
Title: Re: Why different contribution limits for IRA vs. Roth 401K?
Post by: SummerLovin on November 25, 2015, 02:34:14 PM
I guess what I'm getting at is that after all this time, the crisis of eroding SS, and low retirement balances, someone would have proposed a more simplified option that benefits everyone equally.  I realize many people don't or won't contribute the maximum, but at least give everyone the same opportunity.  There are millions of people who can only contribute 5K, which is nowhere near enough for retirement.
Title: Re: Why different contribution limits for IRA vs. Roth 401K?
Post by: CorpRaider on November 25, 2015, 05:04:03 PM
Ask yourself why health insurance premiums paid via a cafeteria plan with an employer can be pretax and you can't deduct your health insurance premiums until they are above a percentage of your AGI (floor). 
Title: Re: Why different contribution limits for IRA vs. Roth 401K?
Post by: powskier on November 26, 2015, 12:35:08 AM
I just called my senator today and asked this exact question. for those of us without access to 401k and other plans, we are at a serious disadvantage. I just keep putting all my money in a taxable account after maxing the IRA, it is unfair to say the least.
Title: Re: Why different contribution limits for IRA vs. Roth 401K?
Post by: Wolf359 on December 04, 2015, 08:21:19 AM
The IRA was intended as a vehicle to provide tax shelters for retirement savings for workers without pensions. 

The 401K was a provision in the 1978 tax code to allow company executives some tax-preferred treatment for deferring compensation.  It wasn't intended for widespread use, and was not originally intended to be a retirement savings vehicle.  The 401K as we know it was created in 1980, when a Johnson & Co. lawyer asked the IRS for a ruling to apply the 401K regulations to more than just executives.  The IRS decided the law as written didn't specify executives, and let them.  As its use expanded, laws were changed over time to reflect it's status as a retirement vehicle.

I believe there are different contribution limits because of the difference in origins.  As a tax break for the masses, the IRA had limits to reduce its cost.  The 401K was envisioned as a limited impact, so could be more generous.  Even now, more people have access to an IRA than have access to a 401K.

Title: Re: Why different contribution limits for IRA vs. Roth 401K?
Post by: SummerLovin on December 08, 2015, 01:28:10 PM
The fundamental question is why hasn't the tax code been changed for retirement plans to be simplified and equitable?  We've had 35 years to figure out how to make it better.
Title: Re: Why different contribution limits for IRA vs. Roth 401K?
Post by: matchewed on December 08, 2015, 01:29:49 PM
The fundamental question is why hasn't the tax code been changed for retirement plans to be simplified and equitable?  We've had 35 years to figure out how to make it better.

Path of least resistance, it's much easier to not fix something that isn't really broken.
Title: Re: Why different contribution limits for IRA vs. Roth 401K?
Post by: GrOW on December 08, 2015, 05:44:55 PM
Three scenarios to consider:

1) government reviews the differences and raises all options to the highest current option.
2) government review the differences and lowers all options to the lowest current option.
3) we keep government from making the choice we know they will make.

I say this as somebody that feels your pain, a bit. I have a 401k option while my wife has 403b, 457' and big time catchup options for both. I think it is unfair but hey I should just be happy that my wife has her options.