401K vs IRA Contribution Limits?

[mountainsoft]

I'm just curious why 401K's have a $19,500 contribution limit, when Roth and Traditional IRA's only have a $6000 contribution limit (not counting over 50 catchup amounts)? Why wouldn't the same limit apply to both?

We don't have access to a 401K, and it's kind of a bummer that we can only contribute a third of what we could contribute to a work related plan. Especially when there's no employer match with an IRA.

 

[Out-to-Lunch]

We don't have access to a 401K, and it's kind of a bummer that we can only contribute a third of what we could contribute to a work related plan. Especially when there's no employer match with an IRA.

There may be other tax-deferred options open to you. Are you self-employed? File Sched. C?

 

[Sojourner]

I'm just curious why 401K's have a $19,500 contribution limit, when Roth and Traditional IRA's only have a $6000 contribution limit (not counting over 50 catchup amounts)? Why wouldn't the same limit apply to both?

The only answer I'm aware of to this question is "Those are the rules as created by Congress and implemented by the IRS and other federal agencies." Just like the annoying rule that says you can't contribute anything to a 401(k) or IRA if you have no earned income (like many of us here at E-R.org). Why not allow any type of income to go towards IRA contributions? Well, that's just how our wise and illustrious lawmakers decided it would be.

We don't have access to a 401K, and it's kind of a bummer that we can only contribute a third of what we could contribute to a work related plan. Especially when there's no employer match with an IRA.

If you are a full-time employee of a company that doesn't offer a 401(k), I think IRA contributions are your only good option. A solo 401(k) is only available to those with self-employment income, I believe. Personally, I would not have worked for a company that didn't offer a 401(k) or comparable retirement savings plan.

 

[Sunset]

I'm just curious why 401K's have a $19,500 contribution limit, when Roth and Traditional IRA's only have a $6000 contribution limit (not counting over 50 catchup amounts)? Why wouldn't the same limit apply to both?

We don't have access to a 401K, and it's kind of a bummer that we can only contribute a third of what we could contribute to a work related plan. Especially when there's no employer match with an IRA.

Even without a match, a 401K is still more valuable due to the higher limits. Plus it's not an either choice, very often a person can contribute to both at the limits: $19,500 + $6,000 = $25,500 per year.

Of course a self employed 401K has the limit of just over $50,000 yearly contribution so it's great in my book.

 

[mountainsoft]

that's just how our wise and illustrious lawmakers decided it would be.

Yeah, that's probably the most accurate answer. I'm always amazed how complicated the various rules are. It's like they sit up at night trying to figure out how to make things more difficult.

If you are a full-time employee of a company that doesn't offer a 401(k), I think IRA contributions are your only good option. A solo 401(k) is only available to those with self-employment income, I believe. Personally, I would not have worked for a company that didn't offer a 401(k) or comparable retirement savings plan.

My wife works for the county. She has a nice state backed pension plan, but no 401K. I'm self employed but didn't know about the solo 401K until last year.

In any case, we'll only be contributing another couple years anyway, so this was more curiosity than anything.

 

[Big_Hitter]

I'm just curious why 401K's have a $19,500 contribution limit, when Roth and Traditional IRA's only have a $6000 contribution limit (not counting over 50 catchup amounts)? Why wouldn't the same limit apply to both?

I know someone who does know that answer, as I heard him speak to it in a CE session several years ago. I just don't remember exactly why the limits are so disparate.

message this guy https://www.linkedin.com/in/richard-hochman-erisa

he's been in the business forever and was around during the formation of ERISA

 

[target2019]

The answer to too many questions: "It is what it is."
Of course there are actual reasons in the history of the tax legislation, but this is what we have now.

 

[Big_Hitter]

The answer to too many questions: "It is what it is."
Of course there are actual reasons in the history of the tax legislation, but this is what we have now.

ERISA, TEFRA, DEFRA, REA, TRA ’86, USERRA, GUST, EGTRRA and PPA

 

[Born2Fish]

Yeah, that's probably the most accurate answer. I'm always amazed how complicated the various rules are. It's like they sit up at night trying to figure out how to make things more difficult.



My wife works for the county. She has a nice state backed pension plan, but no 401K. I'm self employed but didn't know about the solo 401K until last year.

In any case, we'll only be contributing another couple years anyway, so this was more curiosity than anything.

Have you looked into SEP Plans?

https://www.irs.gov/retirement-plans/retirement-plans-for-self-employed-people

The way it reads, you can contribute up to 25% of your net earnings from self employment up to a max of $57k for 2020.

I know some guys who consulted that were saving the max every year.

 

[USGrant1962]

Just speculating here, but 401(k)s were intended to be a defined contribution replacement for defined benefit pension plans, while IRAs were intended to be supplements. That doesn't help mid-to-low earners who don't have pension plans at work, but those folks also rarely have large amounts available to contribute to IRAs or 401(k)s.

And following the lead of the nit-picking discussion in the pet peeve thread, it is Section 401(k) of the Internal Revenue Code. Not 401k, 401K or 401(K)

 

[Sunset]

Yeah, that's probably the most accurate answer. I'm always amazed how complicated the various rules are. It's like they sit up at night trying to figure out how to make things more difficult.



My wife works for the county. She has a nice state backed pension plan, but no 401K. I'm self employed but didn't know about the solo 401K until last year.

In any case, we'll only be contributing another couple years anyway, so this was more curiosity than anything.

You can get a solo-401K IRA and a solo-401K ROTH , and split the contribution amount of $57K per year between them as you like.

I was able to stash a nice chunk in the solo-401K ROTH in a few years due to the high limit levels.

Vanguard has a nice one, and it's just paperwork they help you fill out , but must do it now for the year 2021 as has to be in place prior to 2021. The process takes 2 months (to be safe).