Why Are IRA Contribution Limits So Low?

When I first started learning to invest, one of the first things that I learned about when it came to retirement accounts was the Roth IRA, mostly from the teachings of my father. Sounded like a really good plan at the time and I couldn’t think of any drawbacks to it. Although my contributions would be taxed prior to going into my account so that I could withdraw money tax free in retirement, I was and still am in a low enough tax bracket where it seemed like a great trade-off. Plus I could get to put in $5500 a year which I assumed would be plenty to save for retirement. As I progressed in my investing and embraced the dividend growth strategy I decided achieving financial independence would become my new goal instead of a “normal” retirement age. The key to this I quickly learned, by way of reading great blogs such as Mr. Money Mustache and Dividend Mantra was that saving and investing a high percentage of my income, 50% or more, was really the key to achieving this goal.

Once I got my spending under control and began this new frugal lifestyle completely, I realized how quickly I was going to max out my Roth each year, leaving me to have to invest the rest of my savings into taxable brokerage accounts. While having a large chunk of my investments in taxable accounts will allow me more flexibility in early retirement, I would still like to take full advantage of my Roth as I’ve learned more about being able to withdraw contributions (principle) from these accounts before 59 1/2 years of age without penalty. I tried to figure out any other way of contributing more to a tax-advantaged account. I looked into maybe opening a Traditional IRA, I figured if I did that, maybe I could contribute $5500 to both? πŸ˜‰ After a very short google search I quickly realized that this would not work. The $5500 limit is for all the IRA’s you own, regardless if you have multiple accounts or account types. πŸ™

What’s the point of the government trying to give incentives for people to save for their own retirements and be self-sufficient if you are going to limit how much they can save? Shouldn’t ol’ Uncle Sam allow people like me, who despite their relatively low income want to put away large amounts of money each year for their retirement? Plus, I imagine a majority of the individuals out there with IRA’s probably invest in mutual funds and probably don’t have the investing itch that I do, investing the rest of my money in a “non-retirement” account. So what did I do? I did what any good citizen should do, write my Congressman.

Figuring I had a better shot at getting a response if I diversified a little, I sent the same e-mail to both the Representative from my district and both of my state’s Senator’s. A staff member of one of the Senator’s actually called me to discuss my proposal to increase the limit for at least for those in the lower tax brackets but he didn’t seem to really understand what I was asking for and just gave me a lot of political bullshit. The second sent me an e-mail which you can see below explaining how the government can’t afford to raise contribution limits to tax-advantaged accounts like IRA’s and 401k’s due to the potential lost revenue.

Dear Mr. SFZ,

Thank you for sharing your views on the system of retirement tax incentives. I agree with you about the importance of encouraging Americans to save for their retirement, particularly given employers’ increasing shift from defined-benefit pension plans to defined-contribution plans, and many Americans’ concerns about whether they will outlive their savings. 401(k) plans and IRAs serve a crucial role in facilitating retirement savings, and I will carefully consider the effects of any proposed changes to these incentives in upcoming tax reform efforts and budget negotiations.

While retirement tax incentives like IRAs undoubtedly benefit our society by encouraging people to plan ahead for their future financial needs, I cannot commit to expanding their reach. As it stands, these tax incentives will cost the Treasury approximately $117 billion this fiscal year in forgone tax revenue, and in a time of tightened budgets and growing national debt, we must be cautious about increasing this figure, whether by raising allowable contributions or by reducing penalties for early withdrawal. That said, I remain open to tax reform proposals that tweak this system in fiscally responsible ways.

Once again, thank you for being in touch with me. I will be sure to keep your thoughts in mind while I work on the wide range of issues that come before the Senate. Please feel free to contact me in the future on other matters that I can bring to the Senate’s attention.


Best Regards,

United States Senator

This is the actual e-mail, copied and pasted directly from my g-mail account with just one minor name change. πŸ˜‰

So basically I have to hinder my investing, impacting my retirement goals because the government can’t afford any additional lost revenue. If a 21 year old can get his financial house in order and develop a long-term approach to his financial management practices, why can’t the government?

In the mean time until our country can get it’s massive spending habit under control so it won’t “need” all this tax revenue and contribution limits can be raised I plan on continuing to max out my IRA(s) and investing the majority of the rest of my monthly savings in my taxable brokerage/Loyal3 accounts. I’m also starting up my Thrift Savings Plan contributions this month which although will not allow me to invest in dividend growth stocks, will allow me to put more money away in a tax-advantaged account on top of my $5500 IRA contribution.

What are your thoughts on IRA and 401k limits? Do you believe they should be raised? How about for individuals with lower incomes? Share your thoughts and opinions below with a comment. Thanks for reading!Β 


  1. Couldn’t agree with you more about the expectation that individuals manage their personal financial house, but those elected can’t seem to do the same. However, since those things are mostly out of our control, returning our focus onto growing our passive income streams is key.

    As for the limits on retirement accounts, I think there is plenty of options there. If your employer offers a 401k, you’ve got $17,500 of contribution limits, on top of the $5,500 for an IRA. For someone looking to take advantage of financial independence at a younger age, significant taxable investments will need to be made.

    1. The main reason I would like to see IRA limits raised is for those without employer retirement accounts and the lack of investment choices for the majority of 401k plans. I currently started contributing to my TSP (government employee version of a 401k) again to try to put more money in a tax advantaged account with plans on rolling it over and converting to a Roth later on with the ability to withdraw contributions which in my case would just be dividends after 5 years. The only issue with it is that I’m only limited to index funds right now, which although are great with low expense ratios but do not pay any dividends so they don’t really fit my long-term goal of building up a reliable and growing stream of dividend income.
      I definitely agree with your statement of needing a lot of your investments in taxable accounts in order to retire early. I believe Jason over at Dividend Mantra has 100% of his investments in taxable accounts so he’ll have no problem accessing all of his dividends immediately upon reaching financial independence. I’d just like to try to take whatever advantage I can of retirement investment vehicles. I guess I just don’t like paying much for taxes. πŸ˜‰
      Thanks for stopping by and commenting W2R, I appreciate the feedback.
      Best wishes,

  2. Typical government response. That’s a great idea…but our budget sucks so no. Politicians talk about the horrible retirement landscape that we have but then do nothing to promote positive change. Although I don’t think raising the limits would all of a sudden improve the financial state of most individuals. Considering how most people already aren’t maxing out those accounts, raising the limits won’t help them out at all. Contributing $0 of $5,500 or $0 of $10,000 is still $0. This would greatly improve the responsible ones that are already maxing out those accounts though.

    I’m not really sure how to fix the main problem, which is getting people to contribute at all. I don’t know if it’s just a mindset thing where they just don’t believe they can do anything to improve their retirement prospects or if it’s an education/exposure to basic PF/investment ideas/calculations. I think a lot of it is a combination of both where people haven’t been exposed to financial matters so they don’t think there’s anything they can do. I would like to see more financial education pushed for high school seniors. Either make it a separate required class or spent 6 weeks or so in the economics class. Well, here in Texas we had an economics class that was a requirement to graduate, not sure about other states. Unfortunately that class only covered very broad macro ideas and simple supply/demand with just one semi-pf related project. We had to come up with a monthly grocery budget or something like that and get pictures/prices of the products that we would buy. Nothing really that in depth.

    1. Hi JC!
      “Contributing $0 of $5,500 or $0 of $10,000 is still $0.”
      Great point. Low contribution limits is only a small part of the retirement savings problem we have here in the U.S. Getting people to actually start is a lot more important.
      I completely agree that we need more financial education, most likely at the high school level. Books like the original Rich Dad, Poor Dad, which explains financial concepts in an easy to understand way should be required reading.
      I was talking to some of my co-workers the other day who just got his own apartment downtown after moving out of the barracks. He was saying he had to actually learn how to write out a check for the first time since he had never done it before or been taught. And he’s 24 years old! How can such simple skills not be taught in school?
      I grew up in Maine and we don’t have any personal finance classes there, at least not at the school I went to. The closest was a social studies elective course (can’t remember the name) that had a project in it where you started out with a hypothetical 10k and you had to invest it in stocks and there was a competition on who could grow it the most over the course of the school year, basically encouraging short-term stock trading. Good thing I didn’t take it, the teacher probably wouldn’t have liked it if I had spent the whole 10k on equal amounts of Coca-Cola, JNJ, General Mills, etc and then just did nothing the rest of the year. πŸ˜‰ I think a basic curriculum covering budgeting, and the basics and importance of retirement savings-Roth IRA, 401k, etc. would do a lot towards helping people save more and be more self-sufficient.
      Thanks for stopping by and commenting.
      Best wishes,

  3. Wow…..thanks for trying! I agree that expanding the limits would be great, but to the senators point our budget is already screwed up enough.

    Thats why I’m maxing out the ROTH while I still can πŸ™‚

    Long Term Brian

    1. Not a problem man, it didn’t really do much but it was cool interacting with my representatives/senators like that. I didn’t think I’d actually get a response.

      Yeah same here for the Roth, maxing it out is one of my goals this year and in the foreseeable future.

      Best wishes,

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