should 401K limits be raised significantly?

[FIREd]

For reference: our effective Federal tax rate was 24.65% in 2010 according to Turbotax. Income in the mid 6-figure range, married, no kids. DW was the only one who could contribute to a retirement account (401K). Very few deductions: interests on a small mortgage, low property taxes, low state income taxes and charitable contributions. Deductions totaled less than $30K. The AMT takes away about half of these deductions' tax savings.

According to various tax calculators, a couple making $200K (single salary) who does not contribute to retirement accounts and takes the standard deduction should pay an effective Federal tax rate below 20%.

 

[clifp]

Really, one anonymous guy on a message board shows up claiming to be getting a $100K COLA'd pension and that is enough to assume his claimed situation applies to public workers generally? I don't doubt some folks manage to get that, but I don't think you can use outlier examples to argue for broad based changes in 401(k) rules.

And to the WSJ article, I have a number of prison guards in my family. Any time you want to spend a week on the job with them and see how much better off they are then Harvard grads let me know and I can have it arranged. (And no, none of them are looking to get $100K pensions . . . more like 50% of salary, not fully COLAd)

How many of your family members are California Prison guards?

California Prison guards get the same type of pensions that cops and firefighter (i.e. public safety). While there are many different variations of benefits that I've looked at in CalPERS, the most common is 3%*years of service with full retirement after 30 years regardless of age. In many cases you are allowed to include OT, vacation, and unused sick days for your final year(s) salary. I see no reason for Senin to lie about his pension. 100K pension in states like IL, NY, CA, NJ are far from unusual.

 

[rescueme]

401K limit needs to be immediately adjusted up to 30K a year. Then I will quit having my pension envy.

Heck, I felt the same way when the IRA limit was at $2k, from 1982 (when I/DW started our respective IRA's) and kept at that level through 2001, a period of 20 years, which is a bit more than a familial generation...

 

[Tadpole]

Some data

The IRS limits on retirement accounts from 1996 to 2011 are in the table at:
Maximum Benefits and Contributions Limits for 1996 - 2011

Prior to that the IRS limits for 401Ks were:
1995 $ 9,240
1994 $ 9,240
1993 $ 8,994
1992 $ 8,728
1991 $ 8,475
1990 $ 7,979
1989 $ 7,627
1988 $ 7,313
1987 $ 7,000

I'm not sure about non-FERs but, for FERs, the percentage limits ended in 2006 so all people could defer the entire IRS limit. The percent limits (1987-2005) were:

https://www.tsp.gov/PDF/bulletins/oc07-10.pdf​

If there were no limits the taxman would have to wait for too many dollars.​

 

[Gone4Good]

I really would like to know how to have a wage income of 200K and only pay 20K in taxes, being married with no kids, unless you are talking about making a 100K charity donation or something.

Maybe a bigger question is why a single individual with no dependents making $200K should expect to pay only 10% of his income in taxes?

 

[Gone4Good]

How many of your family members are California Prison guards?

California Prison guards get the same type of pensions that cops and firefighter (i.e. public safety). While there are many different variations of benefits that I've looked at in CalPERS, the most common is 3%*years of service with full retirement after 30 years regardless of age. In many cases you are allowed to include OT, vacation, and unused sick days for your final year(s) salary. I see no reason for Senin to lie about his pension. 100K pension in states like IL, NY, CA, NJ are far from unusual.

None in California, several in New York.

And I never said Senin was a liar. But I still wouldn't use the claim of a single anonymous member of an internet forum about his very specific situation to make very broad assumptions about the population as a whole. I don't even think you can use one group of workers, in one field, in one state (say California prison guards) to do that either.

This is the Economist's take, which seems to reflect my thoughts above . . .

. . . in California, over 9,000 such pensioners are getting more than $100,000 a year. . . . To be fair, fat-cat pensions in the public sector are far from typical. According to Alicia Munnell of the Centre for Retirement Research in Boston, the mean public-sector pension is just $20,000 a year

So yes, some do, but the vast majority do not. (and remember, the fat cat pensions inflate the mean. The median is lower.)

Oh, and Individual 401(k)'s do allow contributions of up to $54,500. I'm sure some affluent married couples are using two to sock away $100K per year. So maybe I should claim that it's 'far from unusual' for fat-cat private sector workers to shelter $100K per year tax free for retirement in 401(k)s whereas the poor public sector worker gets a miserly pension of less than $20K.

See how this works?

 

[SunsetSail]

I believe that public sector employees can contribute to 403(b) plans with the same limits as company provided 401(k) plans.

I'm no fan of taxes, but I don't think that huge amounts of tax deferred investment options are necessarily the best way to save. Tax efficient savings in non-tax deferred accounts provides some substantial flexibility.

Also, I think that someone mentioned saving FICA taxes with 401(k)s. All 401(k) contributions are fully subject to FICA tax up to the cap for the SS portion and all contributions are subject to medicare without limit - you only defer the income portion of the tax.

 

[DblDoc]

Oh, and Individual 401(k)'s do allow contributions of up to $54,500. I'm sure some affluent married couples are using two to sock away $100K per year. So maybe I should claim that it's 'far from unusual' for fat-cat private sector workers to shelter $100K per year tax free for retirement in 401(k)s whereas the poor public sector worker gets a miserly pension of less than $20K.

See how this works?

Sigh. I wish. That only works for the self employed. For those of us with employers (in my case a hospital) we are restricted by the HCE rules 401(k) - Wikipedia, the free encyclopedia.

DD

 

[ziggy29]

Who gets $100K COLA'd pensions?

Not unheard of for public safety employees where spiking is permitted. Not the norm, but not as rare as I wish it was.

As for the 401K/403B limits, I think they should be higher -- especially for those without a DB pension plan.

 

[skyvue]

I contribute the maximum $16,500 each year to my 401k and would love to be able to contribute more. However, I bet there is a very small percentage of americans who contribute up to the max each year. I am guessing less than 5%. So it would just be viewed as another "perk for the rich". Plus, what is the win for the government? You just shield additional income from taxation.

 

[samclem]

Proposals for a higher 401(k) limit will conflict with current efforts to reduce loopholes/leakage/exemptions, simplify the tax code, and lower rates.

I'd rather have less "targeted government help" in exchange for some lower tax rates overall. Then we're helping folks who can't contribute up to the present limit of $16.5K per year and reducing government interference.

 

[Aiming_4_55]

I contribute the maximum $16,500 each year to my 401k and would love to be able to contribute more. However, I bet there is a very small percentage of americans who contribute up to the max each year. I am guessing less than 5%. So it would just be viewed as another "perk for the rich". Plus, what is the win for the government? You just shield additional income from taxation.

+1 Keep it as is and keep taxes the same for the next 20 years

 

[FUEGO]

Sure, raise them. As a public employee, I can (and do!) contribute to a 401k AND a 457 plan to the maximum, which equals $33000 a year that comes off my w-2 income. If I were over 50 and could do catch up contributions, then I could put a total of $44k into my 401k+457. On top of that, between my employer and I, my DB pension contributions are around $11-12k a year. So currently I am deferring about $45,000 a year from income tax. Compare this to a privately employed person who gets less than half this level of tax deferral. Not sure why the disparity exists between public and private employees.

 

[DoraM]

I don't think it would be right to increase 401K limits because the private sector employees get social security while the public employees don't (I think). I don't think you need such a large 401K balance if you are going to have a nice cost of living adjusted social security check waiting for you in retirement. Wouldn't this be similar to the pension that the public employees get? Besides, if more retirement money is allowed to be sheltered by 401K contributions then where will the tax money come to bail out the public pension funds?

 

[aaronc879]

I contribute the maximum $16,500 each year to my 401k and would love to be able to contribute more. However, I bet there is a very small percentage of americans who contribute up to the max each year. I am guessing less than 5%. So it would just be viewed as another "perk for the rich". Plus, what is the win for the government? You just shield additional income from taxation.

I would agree that it would just be a perk for the rich. The average person would have to contribute 30% of their pay to max out the 401K at it's current limit. Not many can put that high of a percentage towards retirement therefore it would be favoring the rich or at least the "richer". I am currently contributing 33% and still not reaching the limit.

 

[FUEGO]

I don't think it would be right to increase 401K limits because the private sector employees get social security while the public employees don't (I think).

I'm a government employee and I will still qualify for full SS (theoretically speaking assuming it is still extant). No clue if that is the exception or the rule though.

 

[DangerMouse]

I don't think it would be right to increase 401K limits because the private sector employees get social security while the public employees don't (I think). I don't think you need such a large 401K balance if you are going to have a nice cost of living adjusted social security check waiting for you in retirement. Wouldn't this be similar to the pension that the public employees get? Besides, if more retirement money is allowed to be sheltered by 401K contributions then where will the tax money come to bail out the public pension funds?

I am assuming this is a joke. With the uncertainly of Social Security in it's current format I think it would be a bit naive of anyone to choose not to contribute to their 401k because SS will fill their needs.

What about the poor saps who can no longer even contribute the current 401k max because of the testing done that means if the lower echelons are not putting in you can't either.

 

[DoraM]

I am assuming this is a joke. With the uncertainly of Social Security in it's current format I think it would be a bit naive of anyone to choose not to contribute to their 401k because SS will fill their needs.

What about the poor saps who can no longer even contribute the current 401k max because of the testing done that means if the lower echelons are not putting in you can't either.

I did not intend to make a joke, I was quite serious. Is it really bad to depend on social security as one of the support legs of our retirement? Both my husband and I have been contributing to it for over 21 years and are now in our mid 40s. I haven't been around here long enough to get a feel for what people think about it, but I always assumed it was as stable as a public or private pension or a FDIC backed CD since it is run by the same government. I actually hope YOU are joking.

 

[DFA]

What about the poor saps who can no longer even contribute the current 401k max because of the testing done that means if the lower echelons are not putting in you can't either.

Yep this happened to me just last month, I got a refund from my 401k because of testing. I for one would like to see the testing changed and limits raised related to some index on an annual basis. With the current limits and testing I don't believe you can save enough in a 401k and IRA to retire with a good lifestyle.

 

[LOL!]

With the current limits and testing I don't believe you can save enough in a 401k and IRA to retire with a good lifestyle.

But so what? No one prevents anyone from using a taxable investment account that has no contribution limits and no early withdrawal penalties to help with their retirement.

Indeed, it is surprising how tax efficient such an after-tax account can be. It is almost as good as a Roth IRA under the right circumstances. Of course, one has to be informed about how the tax code works or one will pay more taxes than necessary on such an account.

 

[MichaelB]

I find this thread confusing. Ask me to name the top 100 impediments to building a durable retirement portfolio with a real current value of $2.5M ($100K in yearly withdrawals @4%) and "too low limits on 401(k) contributions" would not make the list. Likewise a limit on any other type of tax deferred savings.

Anyone who has the surplus current income already has the means to save, invest, accumulate and reach their portfolio goal. Tax deferred options are nice but not required.

 

[GregLee]

I'm a government employee and I will still qualify for full SS (theoretically speaking assuming it is still extant). No clue if that is the exception or the rule though.

My wife and I are both getting state government pensions and also SS. Which is nice (>100k). But we did pay in 7% of our salaries plus SS tax for around 40 years, contributing to those pensions. We could have had a 40xy plan, I guess, theoretically, but we never had any spare cash for that, so I never investigated the details.

 

[clifp]

I would agree that it would just be a perk for the rich. The average person would have to contribute 30% of their pay to max out the 401K at it's current limit. Not many can put that high of a percentage towards retirement therefore it would be favoring the rich or at least the "richer". I am currently contributing 33% and still not reaching the limit.

I am inclined to agree, the current limit with periodic adjustments for inflation, is certainly sufficient to fund an adequate retirement in 30 years and a $100K+ (in today dollars) retirement in 40 years. I think most of us who have retired early without pensions, did so with a large chunk of regular savings. Except for corporate bonds, investment income are taxed pretty lightly in this country. The gains from both stocks and real estate can be allowed to compound taxed deferred for many decades and then taxed a low capital gains rates.

Finally to point out the obvious we have pretty huge deficit RIGHT NOW, and I am loath to make it worse by providing yet another tax break for a special interest.

 

[clifp]

I did not intend to make a joke, I was quite serious. Is it really bad to depend on social security as one of the support legs of our retirement? Both my husband and I have been contributing to it for over 21 years and are now in our mid 40s. I haven't been around here long enough to get a feel for what people think about it, but I always assumed it was as stable as a public or private pension or a FDIC backed CD since it is run by the same government. I actually hope YOU are joking.

I don't think it is naive to depend on SS as one of the legs of your retirement. However, SS was never intended as the primary means of funding retirement. In 20 years when you are about to retire, us baby boomers will have sucked out much of the money in the system, and there won't be enough Gen X and Y to pay for all of the retired folks. I would expect that those of under 55, and almost certainly folks in their 40s will see means tests, and/or modest reductions in benefits.

 

[Texas Proud]

None in California, several in New York.

And I never said Senin was a liar. But I still wouldn't use the claim of a single anonymous member of an internet forum about his very specific situation to make very broad assumptions about the population as a whole. I don't even think you can use one group of workers, in one field, in one state (say California prison guards) to do that either.

This is the Economist's take, which seems to reflect my thoughts above . . .
Quote:
. . . in California, over 9,000 such pensioners are getting more than $100,000 a year. . . . To be fair, fat-cat pensions in the public sector are far from typical. According to Alicia Munnell of the Centre for Retirement Research in Boston, the mean public-sector pension is just $20,000 a year



So yes, some do, but the vast majority do not. (and remember, the fat cat pensions inflate the mean. The median is lower.)

Oh, and Individual 401(k)'s do allow contributions of up to $54,500. I'm sure some affluent married couples are using two to sock away $100K per year. So maybe I should claim that it's 'far from unusual' for fat-cat private sector workers to shelter $100K per year tax free for retirement in 401(k)s whereas the poor public sector worker gets a miserly pension of less than $20K.

See how this works?

I am surprised that nobody has challenged you on this post... what got left out seems to be that the mean pension is $20K... then you go on to compare that to the fat cats...

First, most of the people who retire do NOT have their whole career in one place... like my mom who taught for only 13 year... she would be in that 'mean'... and you read about all the teachers etc. who get burned out and leave after 5 to 7 years... (can not find any reference... just from hersay)

Also, there are a number of people who work in other gvmt jobs that do not stay for one reason or another...

If you want to state that pensions of the average gvmt worker is lower than the fat cats, you need to compare them with the same time on the job etc. etc... apples to apples...


Someone else pointed out the flaw in your second argument.... suffice it to say that they did not say that the money being put in the 401(k) is mostly from the person, not the 'company' (or government entitiy).... most of the value of the pension is NOT from the employee... and some do not put any of their own money in.... so it is all extra...


Yes, I see how this works.... do you?