I've been thinking about 401(k) and IRA account, and I think that they got it wrong when they made them.
I use them, but I believe that they are targeted incorrectly, and offer the most to those who need them least.
Here are the problems:
- Poor people can't afford to make a maximum contribution.
- They are tax advantaged to the tune of over 30% for the well off, but as low as 10% for the poor.
In fact, it benefits the well off so much, that the IRS has provisions regarding highly compensated employees, to prevent it being a complete welfare for the rich thing.
So here is my proposal:
Instead of having a maximum contribution of about $13,000.00, where the contribution is deducted from your income, replace it with a $3,000.00 limit, but make that amount subject to a tax CREDIT, not a tax deduction.
It means that for every dollar you put in, you get a dollar back in taxes.
It means that even the poorest person can make a contribution, and that the program provides the greatest benefit to the working poor.
After all, there has never been a need to help the rich save money.