Increasing Contribution Limits for IRAs/401ks Based on Age Brackets

Economy
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Proposal: Increasing Contribution Limits for IRAs and 401(k)s Based on Age Brackets AND Increase overall IRA Contribution Limits for Self Employed Individuals

Introduction

Retirement savings are a cornerstone of financial security for individuals and families. However, existing contribution limits for Individual Retirement Accounts (IRAs) and 401(k) plans do not adequately address the diverse financial needs of savers, particularly those in different age groups. To enhance retirement preparedness, we propose increasing contribution limits for IRAs and 401(k)s, with higher limits tied to specific age brackets, regardless of employment status (eg. W-2 employee vs. self employed).

Advantages of Increasing IRA Contribution Limits to Match 401k Contribution Limits

  1. Encourages Small Business Growth

Current IRA contribution limits are far less than 401k contribution limits ($7,000 vs $22,500 annually), which encourage entrepreneurs to become employees so they can have the opportunity to save for retirement. Under this proposal, it levels the playing field and encourages entrepreneurship.

  1. Less Dependence on Government Assistance in Retirement

Individuals unable to put away sufficient funds for retirement rely solely on Social Security, which for many, is also insufficient to meet their daily needs and lean on state and local programs for further assistance (eg. section 8 housing, food stamps, etc).

Advantages of Increasing Contribution Limits by Age

  1. Addresses Retirement Savings Gaps

  • Younger individuals often have limited disposable income due to education loans, lower earnings, or childcare expenses. Increasing contribution limits as they age provides them with an opportunity to catch up on savings when their income and financial stability improve.

  • Older individuals approaching retirement can make larger contributions during peak earning years to compensate for earlier savings shortfalls.

  1. Encourages Long-Term Financial Planning

  • Age-based contribution incentives promote strategic financial planning over a lifetime.

  • By aligning limits with life stages, individuals are encouraged to save more consistently and prioritize retirement goals.

  1. Supports Rising Cost of Living and Longevity
  • The cost of living and life expectancy continue to rise, increasing the financial burden of retirement. Higher contribution limits allow savers to accumulate more funds to meet these challenges.
  1. Simplifies Catch-Up Contributions
  • Current regulations allow limited “catch-up contributions” for individuals over 50. Expanding age-based limits provides a more streamlined approach to helping individuals maximize their retirement savings.
  1. Boosts National Savings Rates

Encouraging higher contributions at all age levels can lead to a significant increase in national retirement savings rates, reducing dependency on social safety nets.

  1. Enhances Financial Security for Older Workers

Many older workers face a compressed timeline to build retirement savings. Higher limits for those in their 50s and 60s can mitigate the risks of insufficient savings and reduce financial stress.

Proposed Age-Based Contribution Limits

  • Under 30 years: Baseline contribution limits for IRAs and 401(k)s (e.g., $22,500 as of 2025).

  • 30-35 years: Incremental increase of 25% above baseline limits to account for higher earnings and greater financial capacity.

-35-40 years: Incremental increase of additional 35% above baseline limits to account for higher earnings and greater financial capacity.

  • 40 years and older: Additional 75% increase above baseline limits, aligning with peak earning years and the urgency to save for retirement.

Implementation Considerations

  1. Tax Policy Adjustments: Align tax benefits with increased contribution limits to ensure affordability for savers.

  2. Public Education Campaigns: Educate individuals on the benefits of increased limits and encourage participation in retirement plans.

  3. Monitoring and Review: Periodically review limits to ensure alignment with economic conditions, inflation, and longevity trends.

Conclusion

Implementing higher contribution limits for IRAs and 401(k)s based on age brackets, regardless of how they are employed, addresses critical gaps in retirement savings, promotes financial security, and reflects the diverse needs of savers. This targeted approach empowers individuals to save more effectively and ensures a stronger financial foundation for future generations.

Call to Action

We recommend policymakers and stakeholders in the financial and retirement planning sectors to prioritize this proposal. By implementing these changes, we can create a more inclusive and effective retirement savings system.