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RETIREMENT SAVINGS and decent health insurance are major goals for most Americans. Politicians attempt to help. Yet the resulting laws and regulations are confusing to the point of being counterproductive.
Can the average worker figure all this out? Nope. It’s too complex and unnecessarily so. Lucky Americans may get help from an employer, but many folks are on their own. Consider seven examples:
1. You can contribute up to $19,500 to a 401(k) in 2021 if you’re under age 50. But save in an IRA, and you’re limited to $6,000. What if you use a SEP IRA or solo 401(k)? The limit is $58,000.
2. Reach age 50 and you can “catch up” on contributions—but not equally. For a 401(k), it’s $6,500 per year, while a SIMPLE IRA is limited to $3,000 and an IRA $1,000. It gets curiouser and curiouser.
3. You’re eligible to partially or fully fund a Roth IRA in 2021 if your modified adjusted gross income (MAGI) doesn’t exceed $140,000. But if you’re married and file jointly, your MAGI must be under $208,000. Only in the government’s world does $140,000 multiplied by two equal $208,000.
4. You never forfeit unused money in health savings accounts and health reimbursement accounts, but you do so with a flexible spending account. Somewhere in that mess is a bit of logic, I assume.
5. Contributions via an employer to health savings accounts and flexible spending accounts are typically exempt from Social Security and Medicare payroll taxes, but contributions to a 401(k) aren’t.
6. You usually can’t take money from an IRA without penalty before age 59½, but you can from a 401(k) if you leave an employer at age 55 or later.
7. Pull money out of a Roth IRA or Roth 401(k) and your earnings should be entirely tax-free once you reach retirement age. But invest in municipal bonds and the resulting tax-free interest can, for retirees, lead to higher Medicare premiums and steeper taxes on their Social Security benefit.
Professionals spend their working life trying to comply with and explain these rules—and all the complexity and the cost of compliance deter employers from offering benefits to employees. Is it any wonder the average American finds saving for retirement and coping with health care costs so daunting?
Richard Quinn blogs at QuinnsCommentary.com. Before retiring in 2010, Dick was a compensation and benefits executive. Follow him on Twitter @QuinnsComments and check out his earlier articles.
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Yes, confusing, but as already pointed out those who are comfortably able to fund the entire myriad of qualified (and non-qualified) options are typically the people who could also afford expert help in maximizing these contributions. In my previous position where I supervised young adults entering the workforce, I tried to keep it simple. Max out work-sponsored retirement plans, live below your means. If they could reach those rungs then there was a chance they could move further up the ladder. But the thing I find sobering is that even these baby steps are challenging in a climate that pushes instant gratification 24/7, and offers credit to spend even more.
This is a great read. The subtleties of different plans are significant, and can require a lot of work to build optimized savings plans.
Beyond that, the variety of possibilities makes optimization difficult, in part because even if you do understand the rules, your eventual situation is very dependent upon all sorts of variables that you cannot be certain of. When you stop work. Market returns in the time leading up to, and especially right after, you stop working. Personal expenses/health care will vary with life events. The list can get pretty long. Many of the items on that list will have the potential to move you from condition A (which perhaps you optimized for) into condition B (which you did not.)
I completely agree, but this begs the more important issues: 1) the vast majority of Americans don’t earn enough to be concerned with these rules, and 2) for those who have some ability to save, far too many don’t.
Its also worth noting that for those who have saved enough to worry about these rules, they are also likely to be able afford advisors who can help them navigate these rules.
Retirement savings and distribution rules are complicated, but the greater focus should be on helping people save in the first place.
Agree completely, healthcare and retirement plans are way too complicated for the average worker to figure out, and we often don’t get nearly as much value as we could have out of these as a result. Heck, these subjects regularly trip up those who have had quite a bit of training on the topics; for example, we once got well-meaning (but incorrect) advice from employer-sponsored seminars on whether or not withdrawals from a Roth 401k after 55 but before 59 1/2 were taxable or not.
No wonder so many people end up not saving enough or with the wrong health insurance, as timely, accurate information is sometimes so difficult to come by.
Loved “Only in the government’s world does $140,000 multiplied by two equal $208,000.” The federal government’s marriage penalty, particularly on couples earning roughly equal amounts, is baffling. We’re stuck in a 1950’s mentality where husband is the high earner and wife, if she earns at all, earns little. Currently reality is far different.
Richard – great article. My experience with HR is that most have no expertise in retirement plans, and the companies they hire to administer the plans are t much better. I’ve spoken to “experts” at my company’s 401k and pension plan and they just quote from plan documents. Sad situation.
I agree. I spent many years trying to educate workers, even sending out goodbye e-mails several tines a week to help people understand and use their benefits. We conducted meetings for employees and family to help them. All that is gone, internal staff want nothing to do with employees or retirees. Everyone is simply referred to outsource vendor who has no historical knowledge. I can’t even get a response to my own e- mail and I was VP Comp and Benefits. Very sad and indeed. I feel sorry for people trying to navigate the system.
The lack of interest by HR staff and their preference to referring them to the outsource vendors is particularly concerning. The vendors often do not have the employees’ best interests in mind. The HR people should get educated enough to be a resource to employees. Everyone needs someone in their corner.
Richard, thanks for posting, I’m sitting here laughing and not sure why.