The Case for Higher IRA Contribution Limits

January 9, 2015

by Michelle Perry Higgins

Many workers in the U.S. will not have saved enough during their years of employment to ensure a comfortable retirement. A number of studies have documented that too many people have little to no retirement savings. For example, a 2011 General Accounting Office Report on retirement income estimates that of the middle 20% of households nearing Social Security eligibility that had defined-contribution plans such as 401(k)s, the median amount of their 401(k) was $42,000. Relying on Social Security is not the answer as it was never intended to be the sole source of retirement income.

So what can the government do to help people save more for their retirement? One simple thing would be to significantly increase IRA and retirement-plan contribution limits.

Right now, IRAs have a hard limit on the amount that can be contributed, whether as tax-deferred or after-tax contributions. This amount is currently $5,500 plus an additional $1,000 of “catch-up” for people over 50 years of age. While the amount has gradually increased over time, it is still very low. Increasing the amount that could be contributed would be an added incentive to many people such as workers whose employers do not have a retirement plan or to non-working spouses who may be eligible for a spousal IRA.

Most retirement plans, such as 401(k) and 403(b) plans, limit tax-deferred contributions in 2015 to $18,000 with a “catch-up” provision that allows a further $6,000 contribution for participants over 50 years of age. Increasing retirement-plan deferral amounts would likely stimulate additional contributions.

Another change that could be made is to mandate automatic sign-up of employees whose employers have 401(k) or other retirement plans. Right now, automatic enrollment depends on the provisions of the plan. Of course, individuals would be permitted to opt-out as they are with plans that currently use automatic sign-up. While increasing IRA and retirement plan limits might decrease tax revenue to the government at least initially, over the longer term increased private savings provides funds for increased investment, ultimately increasing the country’s wealth, income, and tax revenue.