Why do retirement accounts have a contribution limit? Truthfully, the answer may surprise you — equality. Once again, the experts at Investopedia.com answer our questions, contribution limits serves to ensure equal, or somewhat equal, benefits between high earners and average earners.
Contribution Limits: 401(k) vs. Roth
Retirement savings are made up of several things: personal savings, income, retirement accounts, and Social Security. Unfortunately, it’s not an equal balance and you’ll most likely have to rely more on one income source than another. 401(k)s and IRAs are beneficial because of the tax advantages they offer.
For example, 401(k)s are pre-tax and tax deferred; this means that your contribution reduces your taxable income. You pay taxes on your investment only when you collect it. For seniors over 50, the contribution limit is $27,000.
Alternatively, IRA accounts are after-tax so you can’t reduce your taxable income. However, IRA accounts are tax deferred, and under certain circumstances can be withdrawn tax free. IRA contribution limits for seniors over 50 is $7,000.
These tax advantages are in place to ensure equal participation for all earners.
Securing Retirement Savings
These contribution limits may be subject to change with the Secure 2.0 bill. The bill would increase the age a 401(k) or IRA account holder must be to withdraw from their accounts. Additionally, 401(k) contribution limits would increase by $10,000 and all Roth contributions would be post tax. The bill offers these advantages for saving for retirement but does little to strengthen Social Security.
The Council for Retirement Security is working hard to protect senior benefits. Contribution limits may help even the playing field in retirement; however, Americans save what they can when they can regardless of total earnings. Follow along as we continue with the Secure 2.0 bill next week, gaining insight on what it is, and what it isn’t.