Solution No. 1
The feds create a tax-deductible home-ownership savings plan with a maximum annual contribution of $5,000. Rather than contributing to a 401k and then borrowing those funds for a downpayment, you would be able to roll the funds tax-free (up to $50,000 — more depending on where you live) into the purchase of a home. That would get young people saving, although the program would be available to anyone.
Solution No. 2
Create the principal residence (only one per household) exemption with the same rules as currently exist but with no ceiling on tax-free gains. The exception would be if you used the first solution to fund your down-payment. In that case, assuming the full $50,000, you’d have $50,000 in taxable income. Considering you received a deduction on the front end and tax-deferred income while saving for the down-payment, it’s a relative bargain.
Solution No. 3
Currently, you can contribute up to $17,000 ($22,500 if you’re over 50) into your 401k and $5,000 ($6,000 if you’re over 50) to your IRA. Most people contribute to their 401k to benefit from the company match. Beyond that, the IRA allows you to do more. Therefore, many professionals advise that you contribute up to the match in your 401k, then fully contribute to the IRA. If money is left over, make additional 401k contributions.
That just seems incredibly cumbersome. In Canada, companies that match do so within a Group RRSP. The problem with this is when you move jobs, you can accumulate a number of these plans. As a result, many Canadians end up opening a self-directed RRSP to merge all these accounts. In any event, employees are faced with one main investment vehicle (RRSP) as opposed to two in the U.S. I’d figure out how to merge the 401k and IRA. Less is always better.
Solution No. 4
Once the two plans are merged, the government in conjunction with the financial services industry, should figure out incentives for employees to move funds from pre-tax contributions to post-tax contributions. Why? Because it’s obvious people aren’t going to be able to save enough for retirement, so at least the money they do save will be distributed to them later tax-free. Furthermore, should financial distress hit before then, as it has in the case of the $37 billion in 401k loan defaults, they’ll be able to get at their money instead of having to jump through hoops — even though it’s their own.
You can argue till the cows come home, but the Roth versions of the 401k and IRA are better for your long-term financial health.
Corporations created this mess long ago when they decided profitability was more important than their employees’ retirement. Convincing the government that self-funding was the road to economic salvation, they created the current situation, which suggests we’ve all been duped. Those same corporations now want the government to declare a tax holiday when repatriating cash now held overseas.
Will we never learn? Sadly, I doubt it.