I just maxed out the $17k 401k contribution for this year. Why is this limit so low? Don’t they want people to save for retirement? If anything, there should be a *minimum* contribution. Grumble grumble.
Ideally, the limit for the roth IRA would be about 100 or more times higher than where it is now with no penalties for early withdrawal. Also, it should be able to contain virtually any kind of investment (house, business, etc). This would effectively turn the normal income tax to a consumption tax.
Depending on your current tax rate, I would wonder why you would sock so much away to withdraw in the future at likely high tax rates.
I put next to nothing into my 401k, but that’s because my employer match sucks like no other (they match .25 per $1 for the first 6% of salary) and has a 5 year vesting period for their menial contribution. But I do plan on putting 5k into my Roth IRA this year and just investing the balance of what I would save. That way I control it and don’t get 1% eaten away every year by fees.
So that all of your savings can’t grow tax-free. The gov’t has to get their end at some point.
Yeah, I know the government doesn’t want to give away tax revenue, etc. My main issue is that this contribution limit does not have much relationship with annual income. A fixed contribution limit assumes uniform contributions throughout your career in order to maximize 401k benefits. However, income can be skewed by time - I might earn much less in the future, so I would like to have locked in a higher dollar amount in the 401k early.
If you put up to the limit already, does your employer not offer a match of any type? If they do, arent you giving up some of that match by not spreading the amounts out over the year?
My employer matches a percentage of paycheck contributed. So, a $17k annual contribution does not max out the employer match if $17k is less than matching%*Total compensation. In my case, compensation is heavily weighted at the beginning of the year due to bonus/salary ratio. So, even a small % contribution to the 401k tends to max out the contribution limit early in the year.
I didnt mean max out the match…in fact I meant arent you having to leave some match on the table by having all your contribution go in so early? Although, may not be much you can do about that…
Do you want a cookie?
Most people that max out their 401k in April make too much money for a Roth…which is what I believe Ohai was trying to tell us.
people who do not invest in their 401k and take the ‘free money’ match from their employer need to have their heads examined
Of course they want people to save but are we at a place now where we need big gov’t to give people tax breaks in order for them to prepare for retirement. There’s nothing saying you can’t save, you just can’t save with tax breaks.
In fact, I think the limit is actually too high. Between 401k (17k + employer match), IRA (5k +5k for a spouse), health saving, Education (4k per child I think) – Obama make 800k last year and saved 8k for his girls, does the gov really need to incentivize people making this income to save for college? Plus, the tax breaks of these accounts should hit the bracket starting at the income level for eligible Roth saving or a similar benchmark. This way everyone gets the same break – why should some people get a tax break at the 35% level and others at the 15%?
Aside from the completely asinine position of fairness for all, what exactly is your point? You want to disincent people to save - the very people that have the ability to save the most - just because they can afford to pay the taxes? That’s the most offensive comment posted here in a long time. And that’s including the HCB threads.
I don’t want to disincentivize anything. I believe in personal responsibility, I don’t see why I should demand a tax break in order to save for my own retirement. Why not a tax break to save for a car, boat, etc.?
And yes, the system isn’t fair where the more i make the bigger the tax break I get in retirement savings. If you support a flat tax, which i assume you do considering the tone of your post, you should agree with me on this point.
But a flat tax rate still means high income people pay more taxes than low income people. Similarly, if a flat % tax break is applied to everyone, high income people would get a higher cash tax break. Or are you trying to say something else?
A 401k reduces your taxable income. So if you make $1 million and set aside 17k in a 401k your new taxable income will be $983k. Considering you’re at the 35% tax rate at this level you save 5.95k in taxes (17 * .35). However, if you save the same amount on 100k in income you’ll only save 1.7k as your tax rate on this income is likely to be in the neighborhood of 10%.
Also, why is it that you can save for college tax free at any income but when you pay back a loan they only allow the interest to be tax free up to some small arbitrary income (50-60k). Why shouldn’t the person who took out a boat load of loans to become a dentist get the same tax saving as another dentist who sets aside money for their kids.
Using your example, the $1000k guy got a tax break of 0.595% and the $100k got a tax break of 1.7%. Doesn’t this still show that the tax break is regressive?
Not sure why it would be taken against your entire income but, yes, in that caase the tax break would be regressive (tax rate progessive). Doesn’t change the fact that you get more bang for you buch in tax saving for retirement at the higher rates.
If I’m being an idealist I’m for no taxes. I would prefer a flat tax over what we have now if for no other reason than to put the IRS out of business. I’d prefer even more the “fair” tax approach - consumption based. But neither will happen.
More on-topic, I’m completely against any taxation on investments. I don’t subscribe to your idea of fairness, but I’m all for a level playing field. The only way to accomplish that is to eliminate the taxes altogether. No more Roth IRAs, 529s, 401ks…doesn’t matter. Just save without worrying about getting dinged on the back end.
If you look at two groups and see that one is getting taxed more than the other, it’s never the answer to raise taxes to make it “fair.”
I think the answer is because the govt wants you to pay some taxes along the way. Sure, they want you to have enough money for retirement but they can’t defer everything, they need some revenues. I am always amazed at the differences between the canadian system and the US one. In Canada they let you accumulate the RRSP (401k equivalent) room so you can do more tax planning. 401k contributions that are matched and roth IRAs are almost no brainers but other than that it’s iffy. People need to realize taxes are going up. Very rarely somebody that is maxing their 401k will benefit of that strategy.