should 401K limits be raised significantly?

[ziggy29]

Taxable accounts offer advantages of their own that should not be overlooked.

True, at least as long as dividends and long term capital gains are given preferred tax treatment, and as long as unrealized gains can be deferred indefinitely.

 

[Shawn]

I thought the OP and most of the posters seemed to think we should shift taxes around so that people who want to retire with $100k annual incomes should get lower taxes to make that easier. In my world, that means someone else pays more. I don't know why I would want to set up the tax laws that way.

Because that is how public sector employees are treated.

When I was an employee with the University of California (using 2011 tax year limits), I could invest $16,500 + $5500 catchup in a 403b, $16,500 + $5500 catchup in a 457, and another ~$5000 in a 401a. That's about $50K of tax-differed money. In addition, I could contribute about $27,000 in after-tax contributions to the 401a, and then immediately roll this money into a backdoor Roth IRA with essentially no tax consequences beyond the after-tax component (post 2010 conversion rules). Note that the $49,000 415c limit does not apply to the 457.

Then there is the DB pension. UC's pension is 2.5% x salary x years, with a full retirement age of 60 and an early retirement age of 50 (1.1% at 50). The pension has a partial COLA, which is about 75% of the CPI. Up until a couple of years ago, no employee contributions to the DB pension were required.

The salaries for the 9 employees (5 BS, 3 MS, 1 PhD) in my group ranged from about $120K to $190K (these were 2007 national laboratory salaries projected into 2011). I should mention that UC employees with 20 years of employment have 24 days of paid vacation, plus 12 holidays, and 12 days of paid sick leave each year.

So it is not too difficult to save $75K/yr in tax advantaged accounts and then be eligible for a $100K/yr mostly COLA'ed pension. These are not police officers, fire fighters, or prison guards. These are people who pretty much sit in an office all day, with no dress code, and have a good deal of flexibility about when they arrive in the morning and leave in the evening.

I believe that was the OP's point. Why should the public sector, but not the private sector, have it so good at tax-payer expense?

But it's for the children.

 

[FIREd]

True, at least as long as dividends and long term capital gains are given preferred tax treatment, and as long as unrealized gains can be deferred indefinitely.

If capital gains and dividends were to lose their preferred tax treatment and unrealized gains were to be taxed yearly, the stock market would become pretty unattractive compared to other investments. Someone with a taxable account could divest from the stock market and invest the money in investments offering better tax treatment (like real estate for example). What would you do if the bulk of your money was in a 401K?

 

[FIRE'd@51]

Just a little history for you "young-uns".

Back in the halcyon days of the 1980's I was able to contribute 30K per year to my 401k, which was the then maximum. In fact, one year I was able to contribute 50K (not sure why, but my employer said I could, so I did). Of course, the top marginal tax rate was only 28% back then.

 

[steelyman]

Just a little history for you "young-uns".

Back in the halcyon days of the 1980's I was able to contribute 30K per year to my 401k, which was the then maximum. In fact, one year I was able to contribute 50K (not sure why, but my employer said I could, so I did). Of course, the top marginal tax rate was only 28% back then.

!!! I had no idea the limits were ever that high...

 

[KingB]

Just a little history for you "young-uns".

Back in the halcyon days of the 1980's I was able to contribute 30K per year to my 401k, which was the then maximum. In fact, one year I was able to contribute 50K (not sure why, but my employer said I could, so I did). Of course, the top marginal tax rate was only 28% back then.

I've always maxed my 401k contribution ever since it started and I don't remember contributing that much (30K).

Maybe, I missed some rules.

 

[FIRE'd@51]

I've always maxed my 401k contribution ever since it started and I don't remember contributing that much (30K).

Maybe, I missed some rules.

The rule was 15% of your gross income up to a limit of 30K, so you had to make at least 200K to contribute 30K.

 

[KingB]

The rule was 15% of your gross income up to a limit of 30K, so you had to make at least 200K to contribute 30K.

Thanks for the explanation. I was barely making 30K in the early 80's.

 

[steelyman]

Thanks for the explanation. I was barely making 30K in the early 80's.

Well, I was living on student loans in the early 80s, so wouldn't have a clue. But perhaps that limit is not from an employer-sponsored plan?

Edit: nope, I see that the original comment mentioned an employer. Go figure. As you were...

 

[Independent]

Because that is how public sector employees are treated.

When I was an employee with the University of California (using 2011 tax year limits), I could invest $16,500 + $5500 catchup in a 403b, $16,500 + $5500 catchup in a 457, and another ~$5000 in a 401a. That's about $50K of tax-differed money. In addition, I could contribute about $27,000 in after-tax contributions to the 401a, and then immediately roll this money into a backdoor Roth IRA with essentially no tax consequences beyond the after-tax component (post 2010 conversion rules). Note that the $49,000 415c limit does not apply to the 457.

Then there is the DB pension. UC's pension is 2.5% x salary x years, with a full retirement age of 60 and an early retirement age of 50 (1.1% at 50). The pension has a partial COLA, which is about 75% of the CPI. Up until a couple of years ago, no employee contributions to the DB pension were required.

The salaries for the 9 employees (5 BS, 3 MS, 1 PhD) in my group ranged from about $120K to $190K (these were 2007 national laboratory salaries projected into 2011). I should mention that UC employees with 20 years of employment have 24 days of paid vacation, plus 12 holidays, and 12 days of paid sick leave each year.

So it is not too difficult to save $75K/yr in tax advantaged accounts and then be eligible for a $100K/yr mostly COLA'ed pension. These are not police officers, fire fighters, or prison guards. These are people who pretty much sit in an office all day, with no dress code, and have a good deal of flexibility about when they arrive in the morning and leave in the evening.

I believe that was the OP's point. Why should the public sector, but not the private sector, have it so good at tax-payer expense?

But it's for the children.

I understand that was the OP's point. I was saying that we should lower the caps on DB pensions for everybody, not just public or just private.

The OP wanted to raise the caps on DC plans to make taxes more equal. I prefer that we lower the caps on DB plans to make taxes more equal.


Regarding UC benefits, I doubt that all those vacation, holiday, and sick days are necessary for hiring quality staff. I'll bet they have filing cabinets full of applications for those jobs. But that's a matter for the CA taxpayers to sort out. I was commenting on federal tax laws.

 

[GregLee]

I prefer that we lower the caps on DB plans to make taxes more equal.

What is a DB plan cap?

 

[Independent]

What is a DB plan cap?

The maximum amount a defined benefit pension plan can pay out and still get favorable tax treatment from the federal government. It's currently $195,000.

Maximum Benefits and Contributions Limits for 2006 - 2011

 

[Shawn]

The OP wanted to raise the caps on DC plans to make taxes more equal. I prefer that we lower the caps on DB plans to make taxes more equal.

Regarding UC benefits, I doubt that all those vacation, holiday, and sick days are necessary for hiring quality staff. I'll bet they have filing cabinets full of applications for those jobs. But that's a matter for the CA taxpayers to sort out. I was commenting on federal tax laws.

I understood your position, but I don't understand the reasons for it. What I mean is that you seem to be focused on the DB plan. Unless drastic changes are made, lowering the DB cap will have minimal impact on the federal tax situation.

I come back to the University of California as an example of the public sector. Today, many UC employees can contribute up to $82,500 in tax advantaged DC plans ($44,000 in tax deferred accounts plus $38,500 in Roth accounts through the backdoor). I effectively did this when I was a UC employee. In addition, many UC retirees have $100K pensions, whereas only a handful of employees are impacted by the ~$200K DB cap.

I don't see how lowering the DB cap will have much if any impact on federal taxes. In fact, it may have the opposite effect since pension payouts are taxable as regular income at the federal level.

On the other hand, I understand arguments for limiting DC plans. Why should UC employees be allowed up to $82,500 in tax advantaged plans ($44,000 deferred), when many people are limited to only $5000 in IRA's? I am currently a private sector employee but still contribute $65,000 to tax advantaged plans each year. That is a big range ... $5000 to $82,500, with federal (and usually state) tax payers subsiding the tax advantaged treatment. For the most part, though, I would increase the lower limit rather than decrease the upper limit. Admittedly, this would lower federal tax revenue on the short term and some people would argue that only well-paid employees could make significant (e.g., > $16,500) contributions to tax advantaged plans (I disagree with the second issue since a LBYM lifestyle can free up considerable potential savings).

On the mostly unrelated topic, while UC and similar institutions do have filing cabinets full of applications, there tend to be few qualified applicants. This is why open positions often remain open for some time (or are re-opened). We have spent 2 years trying to fill one position. Of the 100 or so total applicants, perhaps 20 were given a second look, with only 1 or 2 considered qualified for the position. So having good benefits (DC and DB plans) can be a strong hiring incentive.

 

[GregLee]

The maximum amount a defined benefit pension plan can pay out and still get favorable tax treatment from the federal government. It's currently $195,000.

The favorable tax treatment being whether workers pay income tax on their contributions? So then lowering the DB cap would raise income tax slightly, since AGI would be higher?

 

[cons]

This Marketwatch article sheds some light on this topic:

Public-sector workers: Save more now Robert Powell - MarketWatch


The OP's argument doesn't make much sense....you're comparing your income/benefits to someone else.... apples and oranges. Then you cry about it not being 'fair' that someone is getting a 100k public pension. Instead of being jealous and envious of the 100k pension, why not try to improve you're own situation (get a job with better benefits, or negotiate for better benefits at your current job, etc). Your solution is a 'race to the bottom'. Not to mention that it takes action by congress to change the 401k contribution laws (considering how slow congress is at passing/amending laws, I doubt it would ever be considered).

 

[ziggy29]

The OP's argument doesn't make much sense....you're comparing your income/benefits to someone else.... apples and oranges. Then you cry about it not being 'fair' that someone is getting a 100k public pension. Instead of being jealous and envious of the 100k pension, why not try to improve you're own situation (get a job with better benefits, or negotiate for better benefits at your current job, etc). Your solution is a 'race to the bottom'. Not to mention that it takes action by congress to change the 401k contribution laws (considering how slow congress is at passing/amending laws, I doubt it would ever be considered).

Don't forget that some of us, yours truly included, *did* get a job with "better benefits" which, when I hired in, included a DB pension plan, a full "85 point" (age + seniority) retirement plan and retiree health insurance. All of these were taken away from me over the years that followed, mostly in the late 1990s. Had these not been taken from me, I'd be looking at an extremely secure retirement starting in 2018 at age 53.

I guess what I resent sometimes is the assumption that those of us in the private sector greedily chose more compensation over security and benefits when, at least in my case, the retirement benefits were there when I "made the deal". I also feel like some people retroactively act as if I should have known the private sector retirement plans would wither away over the next couple decades while the public sector deal would mostly remain. It also ignores the fact that once someone is in their late 30s or 40s, the chance for a really decent early retirement pension is lower as you really need the 25-30 years of service to make it amount to all that much in many cases. So telling a 40 year old to "go get a job with better benefits" is a bit callous -- especially if that person HAD these benefits when they entered the career-oriented workforce.

Having said all that, I'd recommend that everyone save for their own retirement, as my trust in corporations and government alike are low enough that I'd never expect them to "have my back" for life. And I largely agree about the "race to the bottom." Still, the current trends are not sustainable and the direction of private and public can't continue to diverge. Hopefully the private sector working stiff can start getting a better deal again as opposed to the "race to the bottom" scenario.

 

[Independent]

I understood your position, but I don't understand the reasons for it. What I mean is that you seem to be focused on the DB plan. Unless drastic changes are made, lowering the DB cap will have minimal impact on the federal tax situation.

I come back to the University of California as an example of the public sector. Today, many UC employees can contribute up to $82,500 in tax advantaged DC plans ($44,000 in tax deferred accounts plus $38,500 in Roth accounts through the backdoor). I effectively did this when I was a UC employee. In addition, many UC retirees have $100K pensions, whereas only a handful of employees are impacted by the ~$200K DB cap.

I don't see how lowering the DB cap will have much if any impact on federal taxes. In fact, it may have the opposite effect since pension payouts are taxable as regular income at the federal level.

On the other hand, I understand arguments for limiting DC plans. Why should UC employees be allowed up to $82,500 in tax advantaged plans ($44,000 deferred), when many people are limited to only $5000 in IRA's? I am currently a private sector employee but still contribute $65,000 to tax advantaged plans each year. That is a big range ... $5000 to $82,500, with federal (and usually state) tax payers subsiding the tax advantaged treatment. For the most part, though, I would increase the lower limit rather than decrease the upper limit. Admittedly, this would lower federal tax revenue on the short term and some people would argue that only well-paid employees could make significant (e.g., > $16,500) contributions to tax advantaged plans (I disagree with the second issue since a LBYM lifestyle can free up considerable potential savings).

On the mostly unrelated topic, while UC and similar institutions do have filing cabinets full of applications, there tend to be few qualified applicants. This is why open positions often remain open for some time (or are re-opened). We have spent 2 years trying to fill one position. Of the 100 or so total applicants, perhaps 20 were given a second look, with only 1 or 2 considered qualified for the position. So having good benefits (DC and DB plans) can be a strong hiring incentive.

I think the OP was assuming the 401k limits are an effective cap on tax preferred private savings. You're saying you contribute $65,000 and UC employees can contribute $82,500. For my one sentence reply, I took the OP assumption at face value because my real point was about tax preferences in general.

I'll agree that our tax preferences for retirement savings are a complex mess resulting in extreme differences that don't seem "fair". I'm in favor of massive simplification which would include eliminating any distinction between public and private employees.

However, my simplification would result in reductions in tax preferences for higher income people. A one-size-fits-all limit of $16,500 (or the equivalent in a DB plan) would be fine.

I don't see an argument for giving tax preferences to people who want to arrange high levels of retirement income. (I'm not even sure that I see an argument for tax preferences for any retirement savings, but that's a tangent.)


You mentioned along the way "In fact, it may have the opposite effect since pension payouts are taxable as regular income at the federal level. " I'm not sure what your reasoning is on that. I take it as a given the people make tax-preferenced choices because in order to reduce taxes over the long run. From the government's side, that means lower revenue.