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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?
So I am contributing money I’ve already been taxed on…then being taxed on it again when I take it out? No tax-free treatment on contributions? I dunno…double taxation seems a bit unfair. Simple or not.
Just like a Roth you would not be taxed on after tax contributions or earnings.
You want to do away with IRA’s but would non-working spouses still be able to contribute to your Universal Retirement Plan? Due to an auto immune disease, I retired at 58. But, I am happy that I have been able to fund my IRA each year while my husband still has earned income.
No reason to change that. The main goal is one plan, one set of rules and limits, to encourage saving for retirement.
Sounds a little like CATO’s Universal Savings Accounts.
OK by me.
2026 Transition: Reinstitute 10 year forward averaging at 2026 single marginal tax rates so individuals must convert all accumulated tax-deferred monies from pre-tax to after-tax (401k, 403b, 457, IRA, etc.) Give workers a choice of paying the tax with a taxable distribution without penalty taxes or a tax-free loan. Rollover assets to the universal savings account. This has the effect, to some extent, of allowing everyone to go back in time as if Roth had always been the only option.
Additional tax revenues in 2026 used to pay down federal debt.
Going Forward: Eliminate the link to employers as plan sponsors. Limit to Universal Savings Accounts. Individuals could effectuate contributions by splitting their net paycheck.
Employer’s could contribute on much the same basis as they do today for Health Savings Accounts (where the account is owned by the individual and all money is 100% vested first day). Employers could contribute a nominal amount, a match, or fully fund the account.
You mentioned that “… Most important is an employer match which too would remain tax-free. …” The employer match in a 403b, 401k, 457 or Simple IRA is not tax free today! However, we do now have Roth employer contributions after SECURE 2.0, so, you would limit the employer contribution to a Roth basis.
You could choose the $10,000 per person amount suggested by CATO, or perhaps you prefer the Simple IRA maximum of $17,000.
No catchup.
No non-discrimination.
Every wage earner eligible 1st day.
Every account would have regular 72(p) plan loan provisions but without the $50,000 maximum (so that the “Bank of Quinn” could be used to buy a car, a home, fund college education, regardless of employment status) – loan repayment via electronic banking.
No distributions prior to age 59 1/2. Distributions after 59 1/2 are tax free, a la Roth (but without regard to any 5 year rule). Exception for death, and perhaps disability.
Standard set of Designated Investment Alternatives, probably 5 or 6 or 7 index investments, coupled with a capital preservation option (money market) and access to other investments via self-directed Directed Brokerage – where the investments are not limited to those available in an 401k, but those available in any/every IRA.
FYI, this is a variant of a proposal submitted in an essay contest held by the Society of Actuaries in 2010. It didn’t win any prize.
Note: Dick, what would you do with regard to defined benefit and defined contribution pension plans? Talk about complex.
I like the idea of a single Roth type account.
What I find most difficult of 403(b) and IRA accounts is the mandatory withdrawals.
Let’s compare from the gov’t point of view.
With a Roth, the gov’t gets taxes up front, but has no chance to collect a lot more later. Gov’t has an incentive to keep the latter plans which tax the gains, especially when they beat inflation.
The advantages of a Roth are most apparent to those of us who are older and see how the gears and levers of retirement income work. However, getting to a single model would be challenging. There are too many people with too many options that would have to transition. I can think of one sweetener, but I have to say I shudder to even mention it – a government incentive for the first years one saves in whatever single model plan emerges. For example, a lower tax rate for conversion of existing IRAs and SEPs to the single Roth-type model. I shudder a bit to say that, but those are the carrots that work. And to shudder even more, maybe even a small government match (like private plans offer) for the first few years of a young person’s Roth-type model plan, but one that would become fully taxable if it was withdrawn early.
Are the current plans really that complicated? Most workers have either a 401k or 403b or 457, with maybe a TSP plan, but they do not have all these plans. When I worked i could choose a 401k, and later in life they introduced the Roth versions. That’s it. The other plans weren’t available to me. Those that were are very simple to understand. Deduct now and pay tax later. Pay tax now and not pay later. The Roth model you suggest is fine except for counting towards IRMAA. I would nix that
Thanks for your contribution R Quinn. I have to agree, simple sounds so much better to me. It should all be based on the individual and nothing else. My take is pay the tax when it goes in, and like a Roth no tax when you take it out. That is my preference. I really believe in “keep it simple stupid.” One more thing, when I was 21 in 1968, my tax return was one page with 2 sides, I think, we should return to a simple IRS, but that will never happen in the age we live in.
The old rant of “easy to say is not easy to do” applies here. It would be nice to get a simpler plan, but my experience is each of the current designs came about from someones desire for simple. The question is simple for who? So ask 3 questions, what good, for what people, at what cost.
Simple for the sake of society, for participant sanity, for overall costs? Any way we slice this, somebody screams.
Simple for the participant, the plan sponsor, the IRS?
Simple can drive cost both ways. How do we deal with the exiting plans, do we roll the DB plans into a DC environment? Who bears that cost? Do we just freeze plans till the last participant dies off in say 60 years? Lots of adminstration cost wasted.
Interesting idea, but I’d prefer they take a chainsaw to the tax codes and start there.
As a humble Australlian, I won’t pretend to understand the complexity of the various US retirement systems.
But I can perhaps add some thoughts based upon Australia’s compulsory superannuation system. In a really simple summary, anyone paid a wage, regardless of age or yearly salary, has 12% of their wages put into a superannuation fund. These funds are not run by government, but are heavily regulated and have a strong fiduciary requirement.
However the system did start at 3% decades ago, and has very slowly been increased over time. This gave employers, employees and our economic system time to adjust. It is almost unimaginable to think about a 12% superannuation contribution being introduced at the outset.
Australia is also a very compliant culture. We tend to fall into line with something like compulsory super. I’m not sure that our system would work so well with other cultures around the world.
You’re highlighting a classic trade-off: simplicity versus flexibility. One universal plan would definitely eliminate confusion, but losing the pre-tax option removes a major tool people use to manage their current tax brackets. Also, that ‘generous limit’ is highly relative—what’s generous for one person’s situation might not be for another.
There would be a LOT of concern paid to where that limit got set initially, and how it would adjust over time.
Given pre tax savings are already limited, especially fir highly compensated, would it really be that big of a deal
Explain why you think pre tax savings are unlimited. I got large tax savings contributing to my 401k
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.
For me tax free income of a Roth is a minor advantage. The biggest advantage would be not counting towards IRMAA. That max increase can be a lot of money each year. My savings were greater contributing to a 401k for the tax deduction when working. My current RMD and SS (no pension), along with investment dividends are still below the IRMAA penalties. So investing in a Roth had no advantages for me. If I had a pension it would put me in the penalty area of IRMAA, and Roth distributions that counted towards that is a negative.
I’m ambivalent about the IRMAA “problem.” First, the amount of tax we pay is a reward for our success, not punishment. Second, the amount of Medicare I have used in the 12 years I have been retired far exceeds what I have paid in premiums. My wife and I succeeded in our retirement savings and are grateful that we are financially comfortable and able to give to charity and help our family while we are still alive. We are especially grateful to have good health insurance when so many Americans have too little or none at all.
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
The match is precisely what got me into the 403(b) plan.
My supervisor told me the match was free money and I needed to arrange my finances to take it. I was hesitant because I was getting paid so little, which he acknowledged, but he was right. (He also helped me get two 10% raises the next and following years.)
He wasn’t a perfect supervisor, but I must thank him for this advice. He’s retiring this year, and I bet he has a really big 403(b) balance.
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?
Dan, I will be happy to share the logic. It’s 435 members of congress who each has his/her own idea of what is best for you….or just likes to grandstand.
And the financial industry lobbyists who draft the legislation that Congress enacts.
Yeah, you, Chris, and Steve pretty much have summed it up. Why the heck do we still allow lobbyists to actually compose these bills?