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I mentioned this in a recent HD comment, but I think it deserves more discussion.
It’s time to scrap all tax-advantaged defined contribution retirement plans and replace them with one plan, one set of rules, uniform limits. No IRAs of any kind, no 403b, no 401k, no nothing else.
Just a Universal Retirement Plan- Individual or employer sponsored. All contributions on an after-tax basis and tax and distribution rules following the Roth model. Everyone could contribute up to one (generous) limit.
Higher income earners don’t need the pre-tax contributions and they mean little to middle and lower income earners who have an effective tax rate of 3.7%.
Most important is an employer match which too would remain tax-free just as employer contributions toward health insurance are tax-free to workers.
The plan would provide tax-free income in retirement along with the greater withdrawal flexibility Roth currently provides. All retirement distributions would count as income for IRMAA premiums – income is income after all.
The only issue I can see is while there would be a federal revenue gain in the near term, there might be a greater revenue loss in the long term as tax-free earnings exceed contributions. On the other hand, more taxable income in the short term lowers deficits and government interest payments long term – or should.
So, does simplicity and uniformity make sense? Would more retirement saving be encouraged and retirement income enhanced?
I’m more interested in protecting the Social Security benefits which cover almost everyone. These retirement accounts will slowly die. The advent of Roth accounts seems to be replacing traditional retirement accounts for new workers. First fix SS then simplify.
Why do you say the accounts would slowly die? That implies that they would not be used to save for retirement. They would be used at least as much as all retirement accounts today I would think.
Social Security will be fixed, just not likely before 2029 because are operating on a warped agenda.
Slowly die as traditional converted to Roth and new workers start with Roth as earnings lower. Hopefully SS gets fixed but lately politicians have been weakening the system rather than strengthening it.
Yes they have. Plus the current (false) idea is we can economically grow our way to SS solvency which is absurd and why nothing is being done to make real changes. Several relatively minor changes would fix the problem.
Sounds good except for distributions counting toward IRMAA MAGI. It should be truly tax free. Yeah, I know IRMAA is not a tax, but it works like one.
I don’t have an issue with income related premiums, especially when the income is tax free. They are used by many large employers too.
I agree with the spirit of the idea. The current retirement savings system has become far too complicated for the average worker. Between Traditional IRAs, Roth IRAs, 401(k)s, 403(b)s, 457s, TSP rules, income limits, catch-up rules, RMDs, Roth conversions, pro-rata rules, and then IRMAA on top of it all, the system often feels like it was designed for tax professionals instead of ordinary people trying to save for retirement.
A Universal Retirement Plan has a lot of appeal. One account, one contribution limit, one set of rules, and one clear message: save for your future, and the growth will not be taxed if you follow the rules. That kind of simplicity could help younger workers and middle-class families who are often overwhelmed before they even get started.
That said, the transition would be the challenge. Millions of people built their retirement plans around the current rules. Any major change would need to protect existing balances and avoid punishing people who followed the law as written. I also think we should be careful about eliminating pre-tax contributions completely. They may not matter much to very low earners, and high earners may not need them, but there is a large group in the middle where that tax break helps make saving possible.
The employer match is probably the most important part of any retirement system. A simple universal plan with automatic enrollment, automatic increases, low-cost investments, and a meaningful employer match would likely do more good than simply creating another new account structure. The match is what gets many workers moving.
Jeff
Simplicity makes total sense. If there is anyone on the site that can tell me the logic behind all the different schemes, I would love to hear the explanation. Even the rules for the 10% penalty for early distributions are different for 401(k)s and IRAs. What is/was the thinking here?