This post got really long but I'm not sure where to cut stuff out.
Looking for some feedback about an accumulated IRA Contribution Limit similar to the Tax Free Savings Account from Canada. There was some discussion about it yesterday in the daily thread, and I'm thinking about writing to my senators and representatives to encourage the policy behind IRA's be changed.
As I understand things, the annual contribution limit accumulates if it's not used in full, starting at 18. For an "average" person who realizes in their 30's that they need to save for retirement even if they don't have access to a 401k, this encourages them to get as much saved now as they can. They are encouraged to go beyond the $5,500 limit IRA's have right now.
To some Canadians on here, is that a decent summary? /u/mandawanda /u/GraemeCPA
For support from the right
It's good to demonstrate reduced tax burden.
It's also good to show that the change will encourage people to get away from relying as heavily on government programs such as Social Security.
For support from the left
It's good to demonstrate advantages for lower income households, especially for propelling them into the middle class and securing their future.
It's also not good for "the rich" to get big tax breaks.
I've created 4 groups of varying concern for both parties and outlined how I believe the incentives play out.
They didn't have the money to contribute, but later in life got a higher paying job. They are not being "punished" for having a low income earlier in life, and have a better chance to catch up. This encourages them to put some of the income growth towards retirement, and not to stop at $5,500. Many in this group have no access to a 401k, making IRA's more important even though participation is low.
These people might pull in 60k per year, but haven't prioritized retirement savings. They likely have access to a 401k, and are putting in up to the match, but nothing more. Along they way they learn about IRA's and start putting money into them, and all is well in the world.
They will still have the incentive to put their money in annually because of the market growth they will experience. If they expect significant growth in income over the next couple years, they might "bank it up".
They could hold off making IRA contributions for a number of years, however IRA contributions would still be capped at their income. With IRA's having low annual limits compared to 401k's, and IRA's being limited by annual earned income, the benefit to the "wealthy" would be quite small. If a 60 year old never contributed to an IRA and banked up the $5,500/year limit, there would be $231,000 available for contribution. Not peanuts, but they also had to forego market gains for all that time. They also paid tax on the marginal 5500/year for the many years leading up to the year they take the massive deduction.
Thoughts and feedback?