/ Investing

# Retirement Account Contribution Limit Increases are Not a Cause for Celebration

I'm late with this post, but there was celebration in the personal finance community when the IRS announced in November the newly increased (SEP,SIMPLE) IRA and 401(k)/403(b)/457(b) contribution limits. People celebrated that we can all put away more money for retirement while avoiding taxes.

Unfortunately, these limit increases are only reflective of inflation (and then rounded to the nearest multiple of $500). Hence, while you can now contribute more money to retirement accounts...you need that percentage more (before rounding) to retire. This is not a net gain.[1] From 26 US Code §219 §219. Retirement savings (a) Allowance of deduction In the case of an individual, there shall be allowed as a deduction an amount equal to the qualified retirement contributions of the individual for the taxable year. (b) Maximum amount of deduction (1) In general The amount allowable as a deduction under subsection (a) to any individual for any taxable year shall not exceed the lesser of— (A) the deductible amount, or (B) an amount equal to the compensation includible in the individual's gross income for such taxable year. (5) Deductible amount For purposes of paragraph (1)(A)— (A) In general The deductible amount is$5,000.
In the case of any taxable year beginning in a calendar year after 2008, the $5,000 amount under subparagraph (A) shall be increased by an amount equal to— (I) such dollar amount, multiplied by (II) the cost-of-living adjustment determined under section 1(f)(3) for the calendar year in which the taxable year begins, determined by substituting "calendar year 2007" for "calendar year 2016" in subparagraph (A)(ii) thereof. (ii) Rounding rules If any amount after adjustment under clause (i) is not a multiple of$500, such amount shall be rounded to the next lower multiple of \$500.