Higher IRA Limits Would Provide Tax Relief, Help People Save for Retirement
Although it is true that aging and taxation are inevitable, it is equally true that we can provide tax relief for millions of working Americans while also helping them to prepare for retirement.
Individual Retirement Accounts are the mechanism to achieve those dual objectives. For millions of Americans, IRAs are the only practical option for saving for retirement, other than Social Security.
An estimated 70 million Americans--about half of the work force--do not have a 401(k)-type plan or any kind of pension. They are the self-employed or stay-at-home moms and dads. They rely on a tool implemented in the 1970s to help them save for retirement--a tool that is now virtually irrelevant because of decades of inflation.
The IRA Fairness Act, which I introduced on the first day of this year’s legislative session, would raise the tax-deferred contribution limits on IRAs annually in $1,000 increments. By 2004, American workers would be able to contribute $5,000 to their IRA accounts. Thereafter, IRAs would be indexed to inflation, rounding the contribution limit to the nearest $500.
In addition, my bill would allow workers older than 50 to catch up on retirement savings by allowing them to contribute up to 125% of that year’s limit.
More than 160 of my colleagues from both sides of the aisle have already co-sponsored the IRA Fairness Act, and a version of my bill has been included in bipartisan legislation to modernize our pension laws, as it was last year. President Bush has also called for an increase in IRA contribution limits.
It has a good chance of passing during the current Congress for several reasons. First, an overwhelming majority of House members and senators now realizes that taxes are higher than they need to be. Second, virtually all House members and senators realize that we need to help working Americans provide for their retirement. And third, simple fairness demands that we allow IRAs to keep up with inflation.
When IRAs were created in 1974, the contribution limit was set at $1,500. It was raised to $2,000 in 1981. If the contribution limit had been indexed for inflation in 1974, it would already be more than $5,000.
If we compare two Americans from different segments of the work force, we quickly see the discrepancy. Both Mary and Pete earn $50,000 a year. Mary is a mom who runs a home-based business so she can be with her children. She has no 401(k) or similar contribution-based retirement plan, and can only invest $2,000 a year for her retirement through an IRA. Pete’s employer does offer a 401(k) plan. Through it, Pete contributes 10% of his annual income toward retirement: $5,000.
Mary should have the same opportunity as Pete.
There would be an added benefit to raising IRA contribution limits. The savings rate in America has been in negative territory since September 1998, and IRAs encourage savings.
Savings are the seeds for American economic growth and prosperity. A lack of savings limits business capital and creates an environment for higher interest rates, thereby stifling expansion. The IRA Fairness Act is one vehicle to encourage savings.
Mary may not think about the American savings rate very often. But she does think about paying taxes every April and thinks about her future with every birthday that passes. To provide tax relief now and help her prepare for the future, the IRA Fairness Act is tailor-made for Mary and millions of other working Americans. I urge my colleagues to enact this bill before another April passes.
