Should We Replace 401(k)s with One Universal IRA? Here’s What It Could Mean for Your Retirement
What if we simplified the entire retirement savings system? A recent proposal suggests replacing all employer-sponsored retirement accounts with just two types of IRAs—Traditional and Roth. As someone deeply passionate about helping people navigate retirement planning, I found this idea both intriguing and worth examining.
Let’s break down what this would mean for your future.
The Power of Tax-Advantaged Accounts
Before diving into the proposal, let’s talk about why retirement accounts like 401(k)s, IRAs, and HSAs matter. These tax-advantaged tools help your money grow either tax-deferred or tax-free, and that can supercharge your savings. According to data, 56.6% of Americans have a 401(k). Participation rates are high, with 76% of Gen X and 75% of Millennials involved. Even more striking—80% of today’s millionaires credit their 401(k)s as their primary wealth-building vehicle.
The Proposal: Ditch 401(k)s, Keep IRAs
A recent Yale law paper proposes a radical shift: eliminate employer-sponsored plans altogether and consolidate the system into Traditional and Roth IRAs. The idea is to make the retirement system simpler and more inclusive. Today, 42% of Americans don’t have access to an employer-sponsored retirement plan. This change could open doors for millions.
The proposal also suggests raising the IRA contribution limits to match current 401(k) limits—$23,500 annually, with catch-up contributions for those 50 and older.
Why Some Say the Current System Is Flawed
There are definite flaws in our current setup. For example:
- Some employees have to wait months before they can contribute to their 401(k).
- Investment choices are limited and can come with high fees.
- When people change jobs, they often cash out their 401(k), losing out on compound growth. In fact, 41.4% of workers cash out when they leave a job.
The system’s complexity and inconsistent rules make it harder to build lasting wealth.
How the All-IRA System Would Work
Under the new system:
- Employer plans would disappear.
- Everyone would contribute to their own Traditional or Roth IRA.
- Employers could still offer matching contributions, but these would go directly into an employee’s IRA.
- IRA providers like Vanguard or Fidelity would handle vesting schedules.
- Roth IRA income limits would be removed, making them available to all.
This approach offers more portability, fewer rollovers, and more investment choices.
Potential Benefits
From a flexibility standpoint, I love this idea. Your IRA could stay with you your entire career. No more rolling over accounts when you change jobs. You pick your provider, you pick your investments. It’s all in your hands.
But There Are Some Big Concerns…
Without a tie to the employer, will companies still match your contributions? Maybe, maybe not. And participation might drop. Right now, 73% of workers participate in a 401(k)—mostly because of automatic enrollment. In contrast, only 36% actively contribute to IRAs. If participation rates fall, we risk worsening the retirement savings crisis.
Where Do We Go from Here?
This idea is bold, and it raises important questions. Would simplifying the system help or hurt participation? Would employer matches go away? Could it create a more equitable system, or would it widen the savings gap?
I want to hear what you think. Is this a step in the right direction—or a step too far?
Share your thoughts in the comments, and if you found this helpful, be sure to like and subscribe for more content on planning your financial future.
All writings are for educational and entertainment purposes only and does not provide investment or financial advice of any kind.
