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? 😉 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. 🙁
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.
This is the actual e-mail, copied and pasted directly from my g-mail account with just one minor name change. 😉
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!