Run Away 401k and IRA Contribution Limits
By Pinyo • Jul 22nd, 2007 • Category: RetirementOkay, this post was originally about how I recently had to sell mutual fund shares in my Rainy Day Fund so that I have enough money to contribute $2,000 to each of our IRAs. I was going to tell you that it’s been tougher to contribute to IRA in the recent years because I got married, refinanced the house, spent more money, etc. But now that I gave it some thought, I am renaming this “The big fat lies that Corporate America and the U.S. Government are feeding us.”
The Rising Limits
In the past 7 years, 401k limit risen from $10,500 in 2000 to $15,000 in 2007 — a 43% increase. Similarly, Traditional and Roth IRA limits doubled from $2,000 to $4,000. In the same time frame, many companies replaced their pension plans with a new and more robust investment vehicle called 401k.
401k is a lot more flexible and can be customized to everyone needs. At the same time, we learned that our Social Security system that’s in trouble, but not to worry, our government is helping by increasing the 401k and IRA limits. This way Americans can save more money and have better financial security when they retire.
Most Americans Cannot Take Advantage of Higher Limits
But here’s the kicker, the median household income for 2004 is $44,334. Assuming a very generous 5% annual increase, this household number rises to $51,322. So our employers and government promise financial security as long as we save 37% of our income?!? How many people can truly afford to save that much money?
I would say the increases in these past few years favored richer Americans more than average Americans. One thing I know for sure is that these limits have risen much faster than my salary. No wonder contributing the maximum limits has been tougher and tougher each year.
Your thoughts?
You should only worry about maximizing these contributions if you can afford to do so. Your goals should include a percentage of you income that you will contribute to various investment vehicles.
I, for one, am happy that these limits are rising because I don’t have access to 401k, and the IRA limits for a couple are less than 10% of my income at present. If my goal is to save 10% for retirement, I have to find other, non-tax advantaged ways to do that. Next year, as the IRA limit goes to $5k per person, I will come closer to my 10% and have to put less money in taxable accounts.
MITBeta - welcome to Moolanomy. Excellent points! You’re absolutely right that not everyone has 401k and IRA limit increasing is a good thing for many Americans.
I also agree that maximizing these contribution may not be the right thing for everyone.
I couldn’t agree more - for most saving vehicles (regardless of the country) the reality is that the higher income people are usually the ones “maxing” out whereas the lower income earners rarely contribute anything.
Great point as well by MIT Beta - the limits are fairly arbitrary and (in my opinion) have more to do with how much tax deferral the gov’t will allow rather than anything to do with your personal financial situation.
Mike