why is one $19,500 and the other $6,000?
And a SIMPLE IRA $13,500?
I think it’s because one was intended to be a replacement for the good old fashioned pension and the other a sort of topping off arrangement.
Now I await a schooling from our more learned friends.
The reason is that’s what the law says. Why does the law say that? Well… I think it has to do with limiting the ability of the employer to siphon funds away for their own use and not let their employees contribute to their own retirement through work.
A 401(k) plan requires sacrifices from the employer and are complex to administrate. As much as employers would prefer to only have 401(k)s be available to the top tier of employees, there are rules as to how “top heavy” the plan can be. Thus, really rich people can’t take advantage of the higher contribution limits if other employees aren’t contributing as well.
Traditional IRAs can always be contributed to, and if you don’t have a retirement plan through work, such as being self-employed, you can deduct the contributions on your tax return, and not give any of your employees access to any employer retirement plan. Thus, these are the most limited plans in terms of contribution limits since they contain the fewest safeguards to prevent employers from getting to defer compensation without letting their employees do it as well.
A SIMPLE IRA is basically a 401(k) that has lower limits but lets employees do as they wish with the money (401(k) plans are administered by the employer, and the money isn’t really “yours” until you leave employment). They are simpler on employers, but those simplifications mean they don’t offer as much protection against the big guns hoarding all the retirement benefits, so the limits are lower than 401(k)s, but they do require an employer match and let people put away twice as much as an IRA in addition to an regular IRA contribution, so it’s a balance of the two.
This ^
A 401K is supposed to be a relief from company’s ‘obligations’ to do a pension, sold as giving the individual investor more ‘freedumz’ and control over their retirement. Forget where I heard/read it, but evidence showed that many municipal/state pensions actually did what they were supposed to: smart people who know stuff managing money well. Private companies just didn’t want to be stuck with the obligation.
At very least, if it wasn’t designed this way intentionally, it ended up working out that way, and in my work with a lot of self-employed people, there is a lot of desire to defer as much compensation as possible, because they never know how long their extremely profitable business is going to last against market pressures, and pay less tax now to have more money later is a really big thing for them. Thus, it seems to me that, in general, the limits on retirement plans are based on how much it is possible for the employers to be able to do this without helping out their employees along the way.
ISTM the limits aren’t designed. They just happened. Yes, 401ks were designed to replace defined benefit pensions and therefore need to have higher limits. But nobody is forcing any company to match even a panny’s worth. And the so-called administrative difficulty is trivial nowadays. So no, Congress isn’t doing or not doing anything with these limits out of concern for business; business is simply unaffected by the limits. (Other than to the degree that the “top-heavy” rules would need to adjust along with any major limit increases.)
The reality is that every personal income dollar that goes into a traditional (AKA non-Roth) 401k or IRA is is a dollar the IRS doesn’t get their 20-30% cut of. If we assume the federal budget needs $X total take, then increasing the 401k or IRA limits means they need to raise the tax rate on the remaining dollars to make up the difference.
Ultimately the limits are low enough that the money being tax-defered is mostly money that would be taxed at a low rate anyhow. If they changed the limits to be $100K for each for 401k & IRA a lot of very comfy people could still max them both out. But those people would be the ones otherwise paying the 39% tax rate on those dollars. Not the working class schlubs who’d be paying 10% tax on those dollars.
In a sense, keeping the limits low is a progressive thing tax-wise, even as it is yet another obstacle to the working & lower managing classes ever accumulating serious investible capital.