Retirement Accounts

It seems like we have an absurd alphabet soup of options for retirement accounts nowdays. I just don't get why there have to be so many options. I know as a 24 year old, my Roth IRA currently makes the most sense for me, but what happens when I start working somewhere that offers a 401k? Or if I suddenly start earning a lot more and decide a Traditional IRA would be better for me? Or, what if I finally become successfully self-employed and have the ability to create a SIMPLE or SEP plan? It seems like we could fix this. Here is my proposal.

Each individual has one account which, to distinguish, I will call a Lifetime Investment Account (LIA). These accounts allow both pre-tax and post-tax contributions. Pre-tax contributions are limited to some set amount (lets say $5000/year - indexed for inflation), and post-tax contributions are limited to the individual's Adjusted Gross Income. The account balance grows tax free, and withdrawals after a certain age (say 60) are also tax free. Withdrawals before this age are taxed as normal (earned) income plus a 10% penalty.

So far this is sounding like a combination Roth and Traditional IRA, with higher contribution limits. Here is where it gets efficient though. Each account has three types of access: Owner, Government, and Contributor. There can only be one Owner, and only the Owner can make both deposits and withdrawals. (The Owner is obviously the individual.)

Only the US Government has Government access, which it would use to deposit a new special kind of bond called a Social Security Bond. This is a non-transferable, non-marketable government security representing promised future SS payments, and is void upon death. Read more over at The Skeptical Optimist about these bonds.

An account can have multiple Contributors (there is no limit). Contributors can only make deposits (they cannot even see the current balance of the account). Any other legal entity can be a Contributor. This means your company can contribute to your account, your parents could, your children could, whoever. If you own your own business, it could contribute to your LIA. To keep the tax figuring simple, all contributions made by Contributors are post-tax. Pre-tax contributions can only be made by the Owner.

Remember the contribution limits? These are global limits. In a simple case, if I make $50k this year, and contribute $4k of it pre-tax to my LIA, then assume my AGI is $46k. That is the limit of contributions from all Contributors combined. Anything over this limit is refunded to the Owner and taxed as normal income. Contributions by the Government do not count towards these limits.

The Owner has total control over investing the contributions. The account custodian can offer any range of investments for the Owner to choose from, just like an IRA works today. Ideally these would include (at minimum) several index tracking mutual funds, ETFs, and money market funds, as well as access to equities and regular mutual funds.

The main thing is that this will stop the proliferation of accounts. When you switch jobs, you just give your new employer your LIA information and they sign on as a Contributor. Since they can't see your balance or investments, you don't even have to worry about removing old Contributors (although they can remove themselves). This account stays with you throughout your adult life, and the SS Bonds make it easy to estimate how much you will be drawing there. You can roll the account over to another custodian directly. Direct rollovers will involve liquidating the account assets, then directly rolling over the cash amount to the new custodian. Simple stuff.

I think this also has big tax preparation implications. Since you only have one lifetime account, there are fewer things to keep track of. Since it acts like both types of IRA at the same time, you don't have to agonize over getting better tax treatment. Since anyone can be a Contributor, it does away with all those 401k, 403b, SEP, and SIMPLE accounts.

Finally, your custodian can compete on investment features and tools, just like IRA custodians do today. I'm specifically thinking about the ability to define an asset allocation plan upon account setup, and simply leave it on autopilot throughout the working life.

Obviously the law that created LIAs would remove the ability to create any more of the existing alphabet soup plans, so within a generation these would fizzle out and our tax code could be simpler. Existing plans could also be rolled over into your LIA, subject to the usual rollover tax implications. Basically your existing 401k custodian would sign on to your LIA account as a Contributor, then contribute the value of your account. You (the Owner) could then allocate the contribution as you pleased.

So what am I missing?