Why do I have Four Different Retirement Accounts?

September 16, 2014

One of the worst aspects of the federal tax code is the way it treats saving. Under ordinary circumstances, saving is treated to double taxation at the individual level, reducing after-tax returns to saving and incentivizing immediate consumption over saving.

There are several ways, though, that the tax code relieves this undue burden. Traditional IRAs, Roth IRAs, defined-benefit pensions, and 401(k) plans are some of the most common. Each of these is (rightly) subject to only a single layer of taxation as ordinary income.

However, these all come laden with all sorts of restrictions. There are limits on contributions, meaning that many Americans – yours truly included – have to split their retirement savings among many retirement plans that are – as far as economics of taxation are concerned – treated identically by the tax code. Given that one can contribute to both a 401(k) and an IRA, and each is taxed the same way, what on earth is the purpose of restricting contributions to each of them separately? Is it really so necessary to defend against the phantasmal threat of people contributing too much to their retirement plans?

There are also restrictions on withdrawals – as if retirement is the only need for large amounts of saving. A down payment on a house needs saving. So does a wedding. So does starting a business. Are these purposes any less worthy?

This rigid and disorganized structure of long-term saving accounts is absurd, and the needless complexity appears to come entirely from the idea that people might save too much in these accounts. But there is no such thing as too much saving. The IRS need not be in the business of deciding what we can or can’t contribute to our retirement accounts. Give us one unlimited saving account, tax it properly, like an IRA, and let us use it how we will.


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