President Obama wants to make some changes to the current 401(k) regulations in an effort to make it easier for people to sign up for the plans and thereby save more for the future.
The fact is that many Americans are reluctant to invest (or save for that matter), and most invest very conservatively when they do.
The president wants 401(k)s and especially IRAs to become a voluntary opt-out program, where employees are automatically enrolled unless they choose otherwise. He also wants to make it easier for individuals to put money for unused vacation or sick-leave into their retirement plan, and to receive tax refunds in U.S. Savings Bonds.
These are largely very good ideas—in fact, ideas that were first proposed by conservative-leaning think tanks. But the president should have gone further to create parity among the various individual retirement options.
Workers are currently allowed to invest up to $16,500 this year in their 401(k) ($22,000 for those age 50 and above). Those who have an IRA because they don’t have access to a 401(k) can only invest $5,000 this year ($6,000 for those age 50 and up).
And the self-employed with a SEP IRA can invest up to a whopping $49,000 this year (if they max out on allowed compensation).
Why not fix this disparity? While contribution parity with a SEP IRA may be a bridge too far—at least in the current fiscal environment—401(k)s and IRAs should have the same deposit limits.
Of course, raising the IRA maximum contribution to the 401(k) level would likely cost the federal government some revenue as people put more tax-free savings aside. But at least allowing more Americans to save more tax-free money encourages economic growth, which could offset some of those federal revenue losses — and may even create a revenue gain.
But we have to add that trying to stimulate saving at the same time the president and Congress are hoping to impose a flurry of new taxes is political cognitive dissonance—nothing new, we understand.
At least under these new changes a penny saved is a penny not taxed…for now.
Today's TaxByte was written by Dr. Merrill Matthews, IPI Resident Scholar.