Thursday, December 22, 2011

Why limit on IRA contribution is less than 401k contribution?

It’s interesting that limit on 401k contribution is 16,500 and limit on IRA contribution is 5,000. What could be the reason behind this?

Seems like 401k should be better for employees. After all policy makers want employees to prosper and they make most of their policies so the average people would benefit from it. After all it their job. It should be the logical reason why law makers did it this way. But is it really the case?  

A few employers match upto 6% for 401k contribution.  I don’t see any other advantage of 401k over regular IRA.

Employee has to choose from very limited funds available in 401k plans. One can choose whatever he/she prefer in IRA, but it is not the case with 401k.
Why are there very limited choices in 401k plans?
Would employer benefit from a financial institute whose funds are allowed in 401k plan? I don’t know! Would financial institute benefit from it? Most of the funds available in 401k plan come with expense ratios and no matter how that fund perform, financial institute who offered that plan would make money from that expense ratio. So financial institute would definitely benefit from it!

If financial institute is going to be benefited from it, why policy makers did it? Did/do policy makers get benefit from it? I don’t know if financial institutes pay policy makers or not. May be this is one of the reasons why politicians get financial help from financial institutions for their campaign during election!

Wasn’t the purpose of introducing 401k plan was to help employees? Then how did financial institutions and policy makers are benefiting from it regardless employee get benefit or not!?

Sometimes I wish that limit on regular IRA contribution would be higher so that I can contribute it more and choose whatever fund I like!

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