#CatchUpContributions #RetirementPlanning #401k #FinancialFreedom
The Benefits of Allowing Catch Up Contributions at Young Ages
Increased Savings Potential
By allowing individuals to make catch up contributions at young ages, it enables them to make up for lost time and maximize their retirement savings potential. This can help individuals who may have had periods of lower income or financial instability earlier in their careers to catch up and secure their financial future.
Early Planning for Retirement
Encouraging young individuals to start contributing to their retirement accounts early on can help instill good financial habits and promote long-term financial health. Allowing catch up contributions at a younger age can motivate individuals to take retirement planning more seriously and prioritize saving for the future.
Flexibility and Financial Security
Life is full of unexpected circumstances, and having the option to make catch up contributions at a young age can provide individuals with added flexibility and financial security. Whether facing a job loss, health crisis, or other financial challenges, having the ability to contribute more to their retirement accounts can help individuals navigate through difficult times.
Potential Downsides and Considerations
While the idea of allowing catch up contributions at young ages may seem appealing, there are potential downsides and considerations to take into account. Some may argue that allowing individuals to over-contribute at a young age could lead to abuse of the system or unintended consequences. It is important to carefully evaluate the impact of such a policy change and consider any potential risks before implementing it.
In conclusion, allowing catch up contributions at young ages can offer numerous benefits, including increased savings potential, early planning for retirement, and financial flexibility. While there may be potential downsides and considerations to address, exploring the possibility of allowing individuals to make catch up contributions at a younger age could help promote financial well-being and security for individuals across all stages of their careers.
Why not allow unlimited contributions? Because the government wants its taxes. Why not have the limit be $230,000 per decade rather than. $23,000 per year? There’s no real reason that contributions are limited per year and not per month or decade or lifetime, probably. Legislators had to set rules, so they did.
This is going to sound crazy. But bear with me for a moment…
* Tax advantaged accounts benefit the rich.
Okay wait… before you get frustrated with me… think about it.
Who can save? It’s the people who generally have means. Folks who have extra money.
Who would like more tax advantaged space? The wealthy. Taxes get worse as incomes go up.
So there’s some reasoning behind capping tax advantaged space. Could it be done better? Could the system be tweaked and made better for everyone? Probably. But this is where we are.
Anyways, 401ks were never meant to be the basis for one’s retirement.
Pensions used to dominate the land. Then someone figured out 401k helped to shift the burden of retirement from employer to employee *and* it was cheaper.
IRAs and 401ks were never meant to be the basis for one’s retirement. They were supposed to be *supplemental* to pensions.
If you have the stomach for sitting through an hour long documentary that is absolutely fantastic for explaining this in greater detail, PBS put this together:
* https://www.pbs.org/video/frontline-retirement-gamble/
It is a net negative in terms of tax revenue to have tax advantaged accounts. More importantly, by relaxing the maximums you are giving the overwhelming benefit to high income earners, who already have a leg up. 401ks and IRAs were originally intended for a way for those who weren’t wealthy to help save for retirement.
The “harm” is that it’s a tax break that benefits the (comparatively) well off. Those able to contribute over $23K/yr to their 401K arguably don’t need a tax break as much as someone at lower incomes does.
Because it was your choice. Because you’re in a high earning career even if it took you some time to be high earning. Because your suggestion almost entirely benefits high earners and allows them to delay/avoid taxes which frankly are the ones that can afford to pay more taxes.
Different countries do different things. Just to contribute food for thought… I’m Canadian. Our 401k and IRA equivalents (RRSP and TFSA) have cumulative contribution room. We have contribution room for the 401k equivalent calculated at 18% per year (there’s some fine tuning to that). So if I earn 100k, I get 18k contribution room that carries over until I use it. If I wouldn’t contribute at all, after 10 years, I have 180,000 worth of contribution room. We don’t get taxed on contributions; TFSA’s are different. We still get taxed on withdrawals, and the money grows taxfree in the account until it’s withdrawn. At least this way, if you couldn’t afford to contribute early in your career, you don’t lose the room. If it’s taxation you’re concerned about, withdrawals are taxed. I’m very thankful for this system, as it allows you to contribute high amounts in your 40’s and 50’s.