Retirement account rules are a disgrace

Q I'm wondering why there is a maximum of $16,500 that can be contributed into a combination of 401(k) and Roth 401(k) accounts per year. It makes sense to me that you could only contribute up to $16,500 into a 401(k) account because the before-tax deductions reduce your tax base. But why don't they allow us to contribute additional amounts into a Roth 401(k) account, since it comes from after-tax dollars?

RON, MINNEAPOLIS

A Your question raises an important point: Our retirement savings system is Byzantine. Basically, the 401(k) is the core pension for the private sector, 403(b)s for nonprofits, and 457s for state and local government employees. These plans also come with their Roth versions. (The Roth 457 was authorized for this year.) You also have SEP IRAs, mostly geared toward the self-employed and very small businesses, the SIMPLE IRAs for small to medium-sized companies, traditional IRAs and Roth IRAs.

Yet a number of these retirement savings plans have different rules, regulations and quirks. For example, for 2010 a married couple in their 40s with an employer-sponsored pension plan and an adjusted gross income of up to $167,000 can make a maximum contribution of $5,000 to a Roth IRA. The income limit for the same couple that wants to fund a traditional IRA to the annual maximum is $89,000 or less.

Why is the maximum contribution $16,500 for an employee into their 401(k) at work while a stay-at-home spouse taking care of the kids and aging parents can only set aside a maximum of $5,000 into an IRA ($6,000 if 50 or older)? The amount an employee can contribute into a SIMPLE IRA can't exceed $11,500 for 2010. But if they worked for an employer with a 401(k) plan, the contribution limit jumps to $16,500. If you plan on retiring before age 55, early withdrawal penalties apply to 401(k)s but not 457s.

I could go on, but you get the point. It's a national disgrace considering that all these plans share the same goal: to encourage you and me to save for retirement.

We all know that the demographics of an aging nation are inexorable while living standards for future retirees are increasingly uncertain. One of the great policy challenges facing the country is how to better finance a safe, secure retirement. But the reform questions surrounding Social Security and Medicare, while vital, also are divisive. I think we need a universal retirement account in addition to Social Security. But any overhaul will take years to resolve.

Chris Farrell is economics editor for "Marketplace Money." Send your questions to cfarrell@mpr.org.

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