Someone who makes $107,000 in 2011 is allowed to contribute $5,000 to their IRA. However, the contribution income limits don’t change much from year to year and I think it leaves out one very important factor.
The contribution limits can increase based on inflation. There was no change in income limits between 2009 and 2010, but there was an increase of $2,000 from 2010 to 2011.
While inflation is typically a decent measure, there are other factors that should be influencing this number. The biggest one in my mind is taxes.
If taxes were to rise, there would be less disposable income for someone who makes $107,000. So shouldn’t the limits rise if taxes rise?
If this person is left with $8,000 in disposable income of his original $107,000 income in 2011, maybe after a tax hike he would be left with only $3,000. But that same person might be able to make more money the following year, but he would actually be allowed to contribute less to his IRA account because of that.
I argue that on average, if you have the same amount of disposable income left from one year to the next, you shouldn’t be barred from making the same contribution amount as a year earlier. This could include things like federal tax rates, social security tax rates (which have been temporarily lowered and are still may increase in 2012)
While the current system does account for some external factors, it fails to take into account taxes, which have a very real effect on people.
Readers, do you think IRA contribution income limits should be determined by inflation rates alone or should other factors like tax increases be relevant to the discussion?