Pondering the Maze

Richard Quinn

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 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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