Liz Weston: 401 (k) and IRA were not created equal. Here's why.
Question: Can you explain to me why the IRS allows an employee at a workplace 401 (k) to contribute $ 19,000, but a wage earner without a 401 (k) can only contribute $ 6,000 to an IRA? This seems grossly unfair. Why does a group save three times as much for retirement?
A: Congress works in mysterious ways, and this is far from the only weird wood product of tax law.
401 (k) and IRA were created through various mechanisms.
401 (k) 's birth was almost random. Benefits Consultant Ted Benna created the first 401[ads1] (k) savings plan in 1981, using a creative interpretation of part of the IRS code. Benna prepared the plan to provide an alternative to cash bonuses, not to replace traditional pensions – even if that was what ended up doing.
The IRAs, on the other hand, were created consciously by the Congress in 1974 to give people the opportunity to save independently of their employers.
Increasing the IRA limit will be costly for your budget, while reducing 401 (k) limits would be unpopular, as so many rely on them for the majority of their retirement savings.
You are & # 39; t, but limited to saving only $ 6,000 annually for retirement. You can always save more in a taxable account. You will not receive tax deductions for contributions but your investments may qualify for favorable long-term capital gains treatment if you hold them for at least one year.
Q: For more than four years my husband has had to take a necessary minimum distribution from his 457 postponed compensation plan. We have always chosen when to do so, knowing that it must be done by 31 December.
This year, we dealt with the distribution on December 28 to exploit the stock market. We saw direct deposit of the transaction on our savings account as planned. To our astonishment we received a letter (dated December 27, but received after January 1) from the plan's manager, and informed us that "in terms of courtesy" it had begun a necessary minimum distribution "on our behalf." The letter even "assisted" us with information on how we can "establish a recurring RMD" in the future. We received a check in the mail on January 5 for this unnecessary and unwanted distribution.
This is not just a duplication of my husband's RMD for this account, but this distribution can also push us into a higher tax console. It also sets me up for a further increase in Medicare B premiums due to the higher income.
I've searched, but couldn't find any information on how to roll back or how they might have been so daring, and under what authority they took the liberty to babysit a depositor. Can you provide any information?
A: Before more time goes, put the money into an IRA and hold documentation of "redeposit," said Robert Westley, a CPA and personal financial specialist with the American Institute of CPA's PFS Reference Committee.
The plan vendor will probably send a 1099-R form that includes the second withdrawal, so you need this documentation to avoid taxing extra money. If you don't already have a tax language to help you, consider hiring one to help you navigate it.
Some retirement plans, including the 457s, have languages that allow for forced benefits, since many also do not understand the claim or choose to ignore it. But your husband was obviously not in that group.
Your husband can call the 457 plan provider to find out what happened and how to prevent it again. Or he can just roll this 457 to an IRA with another vendor.
This council assumes that the plan is a state 457, enabling rollover in an IRA. However, if it is a non-governmental 457, it is the type used for highly paid executives in private companies. There is no possibility of transfer, and you may be stuck with a higher tax bill.
Liz Weston is a certified financial planner and personal finance director of NerdWallet. questions? Use the "Contact" form at asklizweston.com.
