As my regular readers know, we are a dual income, no kid, couple in Silicon Valley, which has one of the highest costs of living in America. I was flipping through a real estate magazine the other day and a 1000 sq. ft, 3 bed, 1 bathroom, with no updates was going for $700,000 (the average home in my city sells for around $875,000). This would shock most of the country, but it’s common here. It’s so common that companies have adjusted worker wages significantly higher than the rest of the country simply because they have to. If they didn’t, the most talented people would be forced to move away.
In looking at Salary.com, a software engineer with my level of experience in Silicon Valley should be earning a little over $100,000. I’m not going to give away my income, but let’s use that number as a workable number for my income. My wife is a pharmacist with the military. That is a pretty high-paying occupation wherever we choose to live. She receives a number of tax breaks due to her military status. These two high incomes, along with those tax breaks mean that we have a Modified Adjusted Gross Income (MAGI) that is very close to the Roth IRA limit of $166,000 a year.
I am not looking for sympathy, as that would be absurd. Most people would love to have this “problem.” We obviously make a lot of money, but, living here, we pay a lot of it too. The net gain is similar to what it would be if we lived elsewhere. In Iowa, for example, our income and costs would be proportionally adjusted downward, resulting in a MAGI that would surely be beneath the Roth IRA limits.
In effect we are being punished at the Federal level for choosing to live in an area of a high cost of living. In the immortal words of sports statistician Jeff Saragin, “It offends my sense of right and wrong mathematically.” So what’s the fix? The government should simply look at itself and use the data it is already computing for military housing benefits. For example, the data may indicate that the cost of living in New York City is twice as much as living in Iowa. As such, it could simply adjust the Roth IRA limits up for residents in New York City and/or down for residents of Iowa. That’s the fair solution.
What do you think?
Effectively the government has by eliminating the income cap on converting a traditional IRA into a Roth. The current cap is 100k, but that’s going away in 2010. So just contribute to a Traditional and then make the conversion right afterwards.
It actually doesn’t make that much sense to make the limit on when your contribute. If they were really smart about it they would make it more of question of income at the time of withdrawal.
Just give it up and move to Iowa… It’s nice here. :-P
Sorry that’s still absurd. Anything that makes our tax code more complex, and your proposal definitely makes the tax code more complex, should not even be considered.
The proper solution is to remove the income limits for IRA contributions altogether. It’s insane to propose that because somebody makes too much money, he should not be able to save any of it in a tax advantaged vehicle.
And regarding the comment about converting the traditional IRA to a Roth IRA, keep in mind that this is a loophole that may be closed before you get to use it. In the best case, it’s a fairly complex way to get money into a Roth.
Lazy Man says
Anonymous, I’d buy that solution as well. Unfortunately, I feel there must have been a reason for the limits in the first place.
I think the limit was put in place just to prevent rich people from sheltering too money from taxes. Given especially how Roth IRAs can be a great estate transfer tool, the system could be abused to keep great wealth in limited hands. Personally I don’t think the 4k annual amount would’ve been enough, but there is argument there to be mad. Though obviously there are plenty of people who don’t believe in Estate taxes (or taxes for that matter) don’t think intergenerational transfers of money need to be fettered at all.
It wouldn’t be more fair to adjust the income limits based on location, becuase people move so much throughout their lives (and not always by pure choice), plus the COL can vary widely from year to year in every city/state.
The point of the Roth is to give lower income savers a boost. It’s a tax break to encourage lower class people to save. High income earners can (and probably do) save comfortably, regardless of tax breaks.
Yes, it might be more of a struggle for you to save than for someone with your income living in rural Alabama, but that’s kind of irrelevant. It’s not really the government’s fault or problem that you choose to live somewhere where it costs $1MM to have a decent home. Though if you want to contribute to a Roth it sounds like you could move–you’d be making less money, but you probably wouldn’t even lose any purchasing power since the COL would be so much less.
In fact if you really want to make things fair, we probably shouldn’t have these tax free accoutns at ALL. Or all accounts should be tax free (which would mean our income tax rates would have to SKYROCKET).
My advice: petition your company for a Roth 401k option. Then your income will be irrelevant and you can still have tax free savings. :-)
I think it a sort of silly premise. You chose where you live, and you make more (and are able to save more for retirement) because of it. The limits aren’t set with a person living in Iowa in mind, but they came to some average. If the cost of living is 1/2 in Iowa, do you really think that Iowans are getting paid 1/2? I don’t. Less, sure, but not proportionally. It would be too confusing to implement this even if I agreed!
But maybe they should just remove the limits all together!
Lazy Man says
Meg, this was the outstanding comment that I was expecting to read. Thank you.
Allow me to take your comments in order:
“It wouldn’t be more fair to adjust the income limits based on location, becuase people move so much throughout their lives (and not always by pure choice), plus the COL can vary widely from year to year in every city/state.”
I don’t see why there’s a problem if people move. I moved last year, so this is why it’s at the forefront of my mind. It’s unfair that it’s stayed the same while my income and expenses have grown. As you say, it’s not always by pure choice – thus it’s more of a reason why they shouldn’t lose the ability to contribute to a Roth IRA.
“The point of the Roth is to give lower income savers a boost. It’s a tax break to encourage lower class people to save. High income earners can (and probably do) save comfortably, regardless of tax breaks.”
I understand that. High income owners can’t save as much in high expense areas because a 1 million home takes up quite a bit of that savings. The thing to note here is that high income earners in the rest of the nation can be considered to be lower or (at least middle) class here. If the Roth IRA is about giving the lower and middle class people the incentive to save it should adjust for location. Without changing income, I’m probably middle class for this area, high class for Iowa, and perhaps the richest person in parts of some third world countries.
“Yes, it might be more of a struggle for you to save than for someone with your income living in rural Alabama, but that’s kind of irrelevant. It’s not really the government’s fault or problem that you choose to live somewhere where it costs $1MM to have a decent home.”
I don’t think it’s very irrelevant, in fact, I think it’s the point :-). Early on we established that people don’t always choose where they live. I understand the concept that you take the good with the bad when you move, but I don’t believe the Federal government restrictions should count as a “bad.”
“Though if you want to contribute to a Roth it sounds like you could move–you’d be making less money, but you probably wouldn’t even lose any purchasing power since the COL would be so much less.”
Exactly the point I was trying to make in the article. In another part of the country, my purchasing power would be the same, so why does the government limit my investing options?
“In fact if you really want to make things fair, we probably shouldn’t have these tax free accoutns at ALL. Or all accounts should be tax free (which would mean our income tax rates would have to SKYROCKET).”
There’s no need to throw the baby out with the bath water. As you said, it encourages people of a certain class to save. It should continue to do that, but evaluate class by measuring the top line minus the bottom line to get the net, not just top line.
“My advice: petition your company for a Roth 401k option. Then your income will be irrelevant and you can still have tax free savings. :-)”
I would love to, but there are a couple of problems with this. As a small start-up, having a regular 401k is a miracle. Getting a Roth 401K a company of under 50 people with all the new legislation is a rarity and possibly even an impossibility. Even if it could happen, it would be subject to high fees and not equivalent to a Roth IRA where I have investment choice.
Lazy Man says
You hit the popular misconception “you make more (and are able to save more for retirement)” that’s common to people who don’t live in a land where inflation has run amock. Making more is more than balanced by the housing costs. This is why you hear about 50-year mortgages and things of that nature in California that you wouldn’t read about in Iowa.
I never suggested that Iowa’s limits would or should drop in half. I just suggested that they use the housing data referenced in the article to figure out what the average is and adjust those that are above average appropriately as well as those below average. Maybe it’s only a $20,000 difference between the two. I’m not going to crack the math unless they contact me for my input.
Yes it may be confusing to implement, but since when has that been a criteria for tax law?
I love the idea of removing the limits, but I don’t think that has a chance of passing.
Perhaps the solution to your woes is to simply open a SEP-IRA instead of a Roth. With a SEP you can make larger contributions than you can with a Roth (20% of your net earnings from self-employment or $44,000, whichever is LESS). Even better, you can deduct the contributions you make each year to your own SEP-IRA.
That’s why I use a SEP-IRA, it allows me a larger contribution AND I get the tax breaks I need.
Jeff B. says
You have said in a recent post that your wife makes more money than you. Yet in the example above, you use $100K as a proxy for your income, and then say that with your wife’s income you are ALMOST at the Roth limit. That would mean your wife makes less than $66K? So which is it?
I have been over the Roth limit since it has existed. I also do not qualify for a deduction to a traditional IRA even though my spouse does not work due to income limitations. The concept that these tax benefits should not be available to me, as hard as I work, just because I make a good salary is absurd. I agree with the poster that said in effect “make it available to everyone or abolish it altogether”
Lazy Man says
In the 100K, I’m using the number before taxes. If you assume that I could put 15K in a 401k, that’s only 85K of taxable income. After taxes how much is that – 60-65K? My wife has a similar calculation, but she starts off higher and has less taxes taken out. Hence it’s probably pretty close.
Geekman — SEP-IRAs only applies to self-employed income. I suspect 25% of Lazy Man’s blog income is not going to make a huge difference. All it would do is decrease slightly the amount he would have to contribute to the middling 401K plan offered by his workplace.
Lazy Man, there is no reason for any company (small or not) to not have a great 401K plan with the Roth 401K option. My company has 12 people and we are signing up with Employee Fiduciary. They have an open platform where any fund (assuming your pooled assets meet fund minimums) or ETF ($500/yr per ETF) can be selected. And we’ve picked a lineup of almost all low cost Vanguard index funds. Our average expense ratio will be 0.25%. Total cost of the plan? $25 per employee annually w/ $1500 minimum. No other fees to employer or employee. It’s silly to think your company can’t afford $30 per employee to run a great 401K plan. At 50 employees, your company probably has enough assets to get into Vanguard Admiral/Fidelity Spartan/TIAA-CREF Institutional shares shaving average expense ratio to 0.10%-0.15%.
I suspect your company is like everybody else and is paying tidy fees for an average plan because people in HR are as clueless as the general population about the topic of investing. If you want access to better tax-sheltered options, you will need to be proactive to get the company to change to a different 401k administrator.
Now I do like the idea of having one combined contribution limit that is spread over 401K and IRAs. Don’t like your 401K? Put 15.5K in your IRA then. Or better yet, open up the Federal Government’s TSP plan to everybody. 0.06% expense ratios for TSP index funds? Sign me up now.
You’re absolutely correct. My mistake was thinking that everyone was an independent contractor, I keep forgetting that the majority of people in the U.S. don’t work for themselves and so can’t use the SEP-IRA. I’ve never held a “real” job, I’ve always been self employed, however I have to wonder how difficult it would be to incorporate yourself and ask HR to make checks payable to your corporate name instead of your personal name? Or, even easier, just change the auto-deposit from your personal banking account to your new business checking account. Again, after almost 17 years of working I’ve never been in a “real” office, so I’m sure my simple ideas wouldn’t fly, but it’s always nice to dream.
Joseph Sangl says
Another option would be to purchase real estate and use the 1031 Stark Exchange every time you sell a property.
This allows you to purchase something with after-tax money (just like a Roth) and not pay taxes when properties are sold.
“Yes it may be confusing to implement, but since when has that been a criteria for tax law?”
Haha, quite true.
In this case, should they also change the tax brackets based on cost of living area? After all, 40k would be “poverty” in san fran, right?
It’s an idea, but not one I can be on board with. Maybe I’ll change my mind once I’m anywhere near the roth limits :)
Actually, if you’re self-employed, a SE401K is better than a SEP, especially if you’re trying to maximize your set-aside. My wife has a SE401K and we effectively put 1/3 of her biz income in it, since the first $15.5K of SE income (after SE tax) can go straight to the SE401K. SEPs are good for setting aside SE income if you already have a W2 job and a 401K at work.
By using the SE401K, we were able to contribute to Roths for a couple years longer than we would have with just a SEP.
Lazy Man says
SJean said: “In this case, should they also change the tax brackets based on cost of living area? After all, 40k would be ‘poverty’ in san fran, right?”
I struggled with this one writing the article initially. I finally decided against it, because it would be an extremely radical proposal and no one would take it seriously. It also doesn’t effect us personally since we’d be in the same tax bracket any way you slice it. There’s the personal side of personal finance.
I never knew of the SE401K before so it’s all new to me. Thanks for bringing it up! I do have a few questions about it though and maybe you can help me out.
Perhaps I’m missing something (very possible, I’m a moron afterall) but it seems to me that the SE401K is not as good as a SEP-IRA because you make your contributions to the SE401K AFTER takes, while with a SEP it’s before. And the contributions are tax writeoffs. So, since the maximum contribution to EITHER is $45,000/year (for 2007), I don’t understand how putting money into the SE401K is easier/better than the SEP.
Also with a SEP, and this is directly from Fidelity’s website; “You can withdraw at any time, but a 10% penalty may apply if you are under 59Â½.” Whereas with the SE401K you can’t touch the money until at the earliest 59Â½.
And lastly, just to satisfy my own curiosity (because I’m a moron, remember?) could you please elaborate on what you meant when you said, “SEPs are good for setting aside SE income if you already have a W2 job and a 401K at work?” I’m incorporated so that statement doesn’t apply to me, but I’m really curious as to what you meant and how that can affect someone’s decision on which retirement vehicle to choose.
You may be misreading or reading from too many different sources.
A Self-Employed 401K (or sometimes called Solo 401K) is simply a 401K for a self-employed individual. Because it’s a 401K, it follows 401K rules. It can be pre-tax contributions or after-tax Roth contributions. Totally up to you. It also follows the same rules for withdrawals. 10% penalty before 59.5 — although if you rolled over Solo Roth 401K money to a Roth IRA, you could then withdraw the contributions without penalty.
Besides the Roth option, Solo 401Ks follow different contribution percentage formulas. SEP-IRAs are 20% of salary while Solo 401Ks are 14K + 20% of income. If you’re making 225K, doesn’t matter which you pick since you’ll be capped at the total 45K limit. But any amounts lesser, Solo 401K lets you contribute more.
The disadvantage is that this is a 401K and requires much more paperwork filing. As such, Vanguard does not offer Solo 401Ks nor do many brokerages. The cheapest Solo 401K option seems to be a brokerage account from Charles Schwab.
My wife’s SE401K is at Fidelity, which was the best option when we set it up a few years ago. Once it’s set up, the paperwork isn’t that difficult although it’s a bit of a pain initially. The main thing is you have to keep track of your finances carefully so you can do the “employee contribution” (the first 15.5K) and the “employer profit-share”, (the 20% of the “profits”). In practice, we fund the employee’s share during the year, and fund the employer’s share when we do our biz taxes next year; a non-corporation SE401K can be funded until 15 April the following year.
But since a self-employed person should be doing this anyway, it isn’t much extra work. I found the biggest pain with SE401Ks is that “basic versions” of tax software isn’t set up to handle it – you have to use the “premium biz/LLC edition” of Turbotax to handle a SE401K.
The big advantage for SEP is if you have both W2 income and SE income (like a blog, extra consulting work, etc). In this case, you can have both a work 401K _and_ a SEP funded with 20% of your SE income. And you can still fund a Roth if you qualify income-wise. Note that a SEP is called an “IRA”, but it doesn’t count against IRA funding limits – it is a separate vehicle from Roth or Trad. IRAs.
Disclaimer: please read up on this stuff before making decisions; I’m not a tax guy…
I’m learning a lot here, thanks to everyone for helping me learn, especially LazyMan for having this site!
Alright, I’m beginning to understand what everyone’s talking about when it comes to the differences in contributions. However, could someone please explain to me _why_ that actually matters to the self employed individual running a business? The only real benefit that I can see is if someone wanted to contribute a very large amount of money each year for their retirement, in excess of 20% of their earnings. But I fail to see the _reasoning_ behind contributions that large. In fact, isn’t contributing more than 20% of your income towards your retirement contrary to almost all the financial advice out there? If you have a $100,000 income and start at $0 in your retirement accounts and contribute 15% a year for just 25 years you wind up with over $1.6 million. If you do the $15K and then 20%, making the contribution roughly $35K, yes you wind up with over $3.6 million for retirement, but you’re removing over 1/3 of your income BEFORE taxes. I’m all for looking ahead, but doesn’t over a third of your current income seem just a little extreme?
For us, I make in the mid $100s, and my wife’s SE income is in the mid $70s, for a total in the low $200s from “earned” income. I’m W2 employed, with a 401K. My wife is 1099 self-employed, with the SE401K. Her income is taxed at a marginal rate well over 50%, once one includes federal and state taxes and SE tax. Also, we live quite cleaply – definitely some luck is involved since we have a place in Silicon Valley that we bought in the mid 1990s – and can live on about $40K/year.
So, for us, it’s all about the taxes – we pay much more in taxes than we pay in total living expenses. My wife either pays nearly $40K out of her $70K to Uncle Sam and Uncle Schwarzenegger, and probably quits since it isn’t worth it to get out of bed in the morning, or we try to use every tax sheltering device available and get her taxes down to a less evil $15-$20K.
It isn’t so much about “retirement” – it’s about how much of our savings is tax-deferred or not. Also, we’re old enough that the “withdrawal age” isn’t that far away.
Lazyman, I agree with you completely. However, this is not the only place the tax code penalizes people that live in high cost areas. I mean, if we are going by purchasing power, shouldn’t income be taxed differently based on the state in which you live? On top of this, if you are in CA you also get penalized for the fact that our state has a state high income tax – since it makes us more likely to fall into AMT, and so on and so forth. There are many examples.
However, the whole retirement savings system in this country makes no sense. Why is it that individuals whose companies offer a ROTH 401K should enjoy the tax advantages of that option, while employees whose companies don’t should be stuck with the alternative?
Why is it that employees should be tied to investment options or retirement options offered by their companies to begin with?
Why shouldn’t there be just ONE type of retirement vehicle that would be open to everyone, regardless of employment status, marital status or income? This vehicle would not be managed by employers, but employers could offer matches to these accounts if they so chose (just like in the 401K system today).
This would make life much simpler for everyone. Individuals would be able to manage their own retirement accounts and reduce the atrocious costs that are typical in most 401K plans; employers would eliminate the cost and liability of managing retirement vehicles; and complexity overall would be reduced.
The big losers? Accountants and full-service (i.e. high cost) brokerage houses.
I understand now. I’m almost the opposite of your situation; my wife is salaried at almost $100K and I earn over $100K as a self employed person giving us over $200K in income every year. However, 10 years ago my accountant and my attorney recommended that I incorporate for the greater tax write-offs instead of staying 1099. For the 10 years since I incorporated myself, my tax burden has lessened to where I get to “keep” (after the corporate write-offs and personal taxes) about 75% of my income, instead of paying the self-employment tax on top of my personal taxes. There also wasn’t an SE401K 10 years ago, so I didn’t even have that option available to me at the time. Lastly, I’m still far enough away from retirement that putting 15% of my income towards retirement seems more prudent than 30%. Especially since I live in NYC and have a brand new baby and plan for more.
I guess what I’m saying is, knowing now about the SE401K and the differences between it and a SEP-IRA, I feel that the SE401K has no advantage large enough to make me consider switching, or even opening one. The added paperwork and, in my situation, unimportant contribution limit differences just aren’t compelling enough to get me to consider the SE401K as a viable vehicle for my self-employed retirement funds.
Lastly, I’m no financial planner, but your wife may want to ask one about incorporating or otherwise becoming a separate business entity for tax purposes. She may find that she can save herself the Self Employment taxes which would have the effect of raising her take home by at least 15%.
Living in Silicon Valley I am totally agree wih what you say. But then the tax laws in the US make no sense. In fact, more than the IRA or ROTH limits what drives me crazy is the different treatment for filers who are single v/s married. I seriously wonder how many other countries have this discriminatory attitude.
I’d prefer they put no cap on 401ks rather than raising IRA limits.
Geekman, another possibility since you operate underneath a corporate structure: Non-Qualified Deferred Compensation plan. No limits on contributions, no penalty for withdrawal before 59 1/2. The limitations instead are: (1) you must define your contribution and withdrawal schedule beforehand, (2) growth on your plan is not tax-deferred — instead it is taxable income for your corporation. #2 is not a big deal if you’re able to offset with business expenses. In addition, 70% of qualified dividends paid to a corporation is not taxable. A very nice option for investing for the medium term.
What do you need to do to make it happen? Well you’ll have to pay a corporate lawyer about $250 to write a trust document for the entity that’ll hold the investment money. And you’ll have to write up some basic plan documentation that define all the rules of the plan. (A corp attorney might have boilerplate for that also.) After that, open up a Vanguard Small Business Investment-Only FBO account.
I agree that a change is appropriate for HCOLA. The tax code lags and it doesn’t consider inflation, which is why its so easy for middle income earners to be hit with AMT.
It’s like the tax on real estate sales. Most people aren’t affected by that tax, because the majority of the realty sales in the country aren’t having 6 figure profits. I don’t think a change would be considered because there are more low cost areas then high cost areas and the creation of pretax deductions already lowered what the government collects in tax.
MossySF: SEP-IRA contributions don’t reduce your available 401(k) limits as long as the two (SEP and 401k) are associated with different employers. In fact, if you have a “regular” job through an employer and you also have side income from self-employment, you have two separate 415(c) limits ($45.5k total for each, considering employer and employee contributions together). Of course, the SEP is still subject to the 25% limit (20% of net) so it’s not like you can just fill it up at will.
LazyMan: The flipside is that you have been riding a hellacious real estate market, and you could easily choose to sell your overpriced real state at retirement and move elsewhere, thereby pocketing a hug windfall. In that case, re-indexing the income limits based on cost of living would provide an unfair advantage to people like you. It’s not perfect, but if there are going to be limits, then they should be the same all around.
With regard to abolishing the limits, it’s not like giving the wealthy access to a $4k tax break is really skewing the playing field. That’s such a small (proportional) amount to the truly wealthy that I can’t imagine that it gives them a meaningful advantage above and beyond their high income and already substantial investment holdings.
For what it’s worth, we’re also over the limits this year, and it sucks. Then again, it’s great, as it means we’re in a great position income-wise. But let me ask you this… Why not just do a non-deductible contribution and then convert it to Roth in 2010 when the income limits are slated to go away?
Lazy Man says
I agree with the hellacious real estate market, but that applies to only homeowners in and those who had bought probably 5+ years ago. For me (and “people like me”) who moved here last year, the real estate market climb is just a barrier to home ownership – even with increased income. The advantage for us is that the rental market hasn’t caught up with the ownership market.
You are right that for the wealthy this tax break isn’t going to mean a lot. For people of middle class net income like myself, it is a valuable savings tool.
I’m not a tax specialist, but I’ve read that the conversion process has a huge problem if you convert an older 401K to an IRA. I would like to do this to increase my investment options with low expenses.
Brip Blap says
I’m not a tax specialist either, but converting my old 401k to an IRA was a snap…
I think Shadox hit the nail on the head. The tax code in the US penalizes people on the coasts. I am teetering on the edge of the AMT due to (ironically) my massive deductions for the horrific property taxes in Jersey. Something will have to change with the US tax code in the next decade. The run up in home prices here in Jersey is having an additional unintended consequence – the linked increase in property taxes. It has gotten to the point for me that even if I save the max in my 401k and IRAs each year AND pay off my mortgage, my property taxes alone cost me $700 per month today. Imagine what they’ll be in ten years. No matter how much I’ve piled in a 401k it wouldn’t be enough to pay for that AND my other expenses.
A 401k becomes pretty much an afterthought for coasters, as opposed to the 100% of retirement needs it is for friends of mine who still live in small towns down South.
I actually agree with all the people from the coast who commented. I live in Westchester county, NY State, and over here housing prices are pretty close to those in Silicon Valley. A one bedroom condo around here costs more than a very nice house in other parts of the States. Plus we pay a fortune in income and property taxes. As to “you can move” argument – for software engineers, like the author of this blog and me, most jobs are on the costs. And it is not just the salary, but the availability of jobs and the type of job you have. How many software companies you know in Ohio?
Also as Brip Blap says, we are penalized because we pay a fortune in state income and property taxes. So far I only managed to avoid AMT because I am single. Had I had a husband earning about as much as I do and a couple of kids, I’d probably be hit with it because you loose exemption for kids for AMT. If I sell some stock, I might be hit with it as well. OK, so I earn slightly over 100K. But it doesn’t go nearly as far around here as everywhere else.
James N says
There is truth to the idea that the income tax brackets are harsher for people in high cost-of-living areas, however this is somewhat mitigated by the fact that NOT ALL costs are higher in these areas, while incomes are nearly all proportionately higher. Specifically, I’m talking about various commodity luxury items: the things that make wealth fun. A nice car or a fancy piece of electronics costs effectively the same in Mississippi or California. For these sorts of things, absolute dollars matters, not dollars-relative-to-cost-of-living.
Similarly, if the Roth IRA limits were raised for high cost-of-living areas, that would allow people living there to sock away more ABSOLUTE dollars. The leveraged retirement income provided by the tax-free growth and retrieval of these would then be exponentially higher than that of folks in cheaper areas. At retirement, people are more or less free to live wherever they want (personal considerations aside, which are pure choice anyway), so at this point where they lived during their working years probably shouldn’t be much of a factor.
I wouldn’t necessarily be opposed to simply eliminating the limits entirely for everyone, except that it would have to involve a significant restructuring of the tax code, I would imagine, to maintain “balance” (like we have one now), and while the tax code is in dire need of significant restructuring, I can’t say I’ve typically seen such efforts result in anything terribly positive…
The EXCLUSIONARY limits are unconstitutional and discriminatory! A good idea with HORRIBLE implementation. So somebody who makes 121K can contribute 5000 but 122K can’t? So that extra thousand dollars can cost the 122K person THOUSANDS in potential tax benefits over his lifetime? RETARDED!!!!