Here’s one of my biggest personal finance pet peeves: one of the biggest source of tax deferral for the middle class, the 401(K), is utterly dependent on the employer.
Doesn’t this arrangement feel a little anachronistic in an age where careers may be characterized by frequent job changes and/or stints at self-employment?
I didn’t have a 401K for 2008. I should have a 401K in the next several months. All that TAXES that’s being taken out of every paycheck is enough to make me see red. I know, I know, public goods and all that jazz… but please.
Why can’t the government set up a portable tax-deferal vehicle that allows an individual to defer W2 earnings? It’d just look like the IRA, with the contribution limits as a 401K. Let’s call it a “private 401K” here.
In essense, instead of the company administering the 401K plan, the individual can choose any provider such as Fidelity, Vanguard, Scottrade, ING, etc. Then, if the employer decides to do so, it can contribute a “match” in the private 401K.
Under this scenario, ANYONE with an earned income would be eligible to contribute $21,500 in tax-advantaged accounts for 2009: $16,500 in a private 401K, and $5,000 in an IRA. The government is worried about people saving adequately for retirement. Wouldn’t this be a step in the right direction?
I can’t imagine that this idea hasn’t been proposed before. On another note, I really think that healthcare insurance should be de-coupled from employers as well.
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That’s a great idea!
We have something in Canada where they take your last year’s earnings, take 18% of that and then that’s the max that you can contribute to an RRSP the next year.. and employers can set up their own little plan under a different bank, but it contributes to your RRSP 18% amount. Or you can avoid the employer altogether and set up your own RRSP account.
Was that what you were talking about?
Fabulously Broke in the City
Just a girl trying to find a balance between being a Shopaholic and a Saver…
This one is easy. Most people wouldn’t save if it didn’t silently come out of your paycheck. It would be really hard (maybe impossible) for your employer to support every IRA through payroll. It’s hard enough to support one lousy 401k.
I think it would be great if it were just deductible, but then I really think people wouldn’t use it.
Self-employed people have a number of retirement account options. One is the solo 401k (along the lines of what you described). There are also the SEP-IRA and SIMPLE IRA.
I completely agree. I hate my employer’s 401k options and would love to be able to manage my money myself. We only have 8 total options to invest in and 1 of them is company stock. Yeah, my options are bad.
I think that dog at my finances is wrong. Maybe some people wouldn’t save, but SOME of us (ie, you) would. I also have $$ direct deposited into my Roth IRA (and 3 other accounts) and payroll handles it.
(And this is not for self-employed people, this is for regularly employed people who don’t have a 401k at their company.)
This has never bothered me, because I haven’t been in your position. However, it is a good point. I wonder what the history of this is, and why it is not offered?
Have you considered investing in a traditional IRA rather than a roth? It might be something to think about, esp. if you are going to school in awhile and will be in a really low tax bracket (and could convert).
I have been thinking about this idea as well. It pisses me off that so much gets taken out of my paycheck, and where does it go???
When I worked in a small city-state in SEA, they would take out your “taxes”, which were actually put into a savings account that you can’t touch until you retire or hit age 65…or, people can use those savings and put it towards paying for a house. Without a penalty. So the money that was taken out of your paycheck, the majority of it would go back to you someway or another down the road.
Unlike here. Paying for somebody else’s social security while there may be nothing left for us. On top of everything else. Bah.
My 401k with my current company is at Nationwide and about to turn 2 years old. I don’t get a company match,(don’t get me started on that) so I also invest as much as I can in my Roth IRA as well. The Roth IRA is also about a little over 1 year old opened right before the economic downturn, was all my choosing and I haven’t done too well mostly due to an international ETF that tanked. I’ve estimated that I lost approximately 36% in my Roth. My company’s 401k didn’t turn out to be awful I lost 32.1% overall and 37.9% in the past year. I choose some of the lower fee mutual funds, so I haven’t felt too stifled by my plan’s choices. Previous employer plans have been with Fidelity, where I can’t figure out my losses, so maybe I’ve just been lucky.
I think sometimes the issue is that some 401(k) are far better than others. My last job was at a startup, so most of the funds available weren’t that great (2%+ expense ratio), but once I started working at a larger company, they had much better options (and a match!).