Can the national debt affect your retirement planning? Considering exponential debt projections, IRA contributions are becoming more attractive. They may be worth prioritizing over 401k(s) — even if an employer matches 401(k) contributions.
IRAs vs. 401ks
Traditional retirement planning advice is to contribute to retirement in the following order:
- Contribute to 401(k)s up to employer match. This reduces taxable income in the year the contribution is made. Employer match is often seen as “free money.” However, withdrawals from 401(k)s at time of retirement are taxable income.
- After the maximum employer match is met, max out IRA accounts — specifically, a Roth IRA account. Current allowable IRA contributions per year is $7,000. Unlike 401(k)s, IRA contributions are not deductible from taxable income in the year they are made. In other words, IRA contributions are already-taxed dollars. However, withdrawals from IRAs — including appreciations — are tax-free in retirement.
Deciding between a 401(k) and IRA tends should consider future tax rates. If future tax rates are higher at time of retirement, the IRA account is superior as any growth in the account is tax-free.
But national debt is hitting levels that future tax increases are all but guaranteed — and future tax rate increases may offset the upfront tax benefit and employer contributions.
For this reason, it might be worth considering inverting the traditional order or priority: Max out the IRA first, then contribute to 401(k)s for employer match.
The State of National Debt
The Congressional Budget Office (CBO) says the federal budget deficit is likely to reach 8.5% of the United States’ GDP by 2054.
The national debt is likely to reach 166% of the GDP in the same year. For reference, the national debt is already 113.9% of the US’s projected GDP for 2024.
The House of Representatives already sounded the alarm, after Congressional Budget Office projections showed that national debt will reach $1 million per American household by 2053.
Currently, the national debt per U.S. resident is approximately $103,900. At current rates, the average public debt per citizen will grow ten-fold in less than 20 years. Without intervention, public debt per citizen will exceed $1 million by 2053.
The CBO projects that outlays, such as interest on the national debt and obligations like Medicare and Medicaid, will reach 27.3% of GDP by 2054. Social Security Reserves are already being tapped into, and benefits may need to be cut in 2035 unless something is done.
Related: Social Security Reserves Projected to be Depleted by 2035
The United States will pay $894 billion in interest on the current national debt in 2024. That is 13% of this year’s federal budget. Interest payments will rise with the national debt. If national debt meets current projections, interest payments alone could reach more than $8 trillion annually.
Lower Confidence In America’s Ability To Pay Its Debts
That’s assuming interest rates remain level over the next 20 years.
However, the CBO anticipates that interest rates could rise, citing variables such as increased federal borrowing. Other variables could include credit ratings issued by Standard & Poor and Fitch Ratings.
Right now, Standard & Poor and Fitch Ratings both rate the nation with a fairly decent AA+. However, they downgraded that rating from their highest, AAA, in 2011 and 2023, respectively. This reflects lower confidence that the United States can pay off its debt unless it raises taxes, slashes spending, or both.
The Congressional Budget Office says the federal government’s revenue will reach 18.4% of the GDP by 2054, a percent higher than the 50-year average of 17.4%.
Most of this projection is based on expected income tax rates, which may vary depending on Congressional tax bills. Taxes are already going up for most individual income earners in 2026 when Tax Cuts and Jobs Act of 2017 expires.
Related: Americans Lose Trump-Era Tax Cuts in 2026
IRA Contributions and Future Taxation Rates
Taxes will likely go up by the time many people in their 30s and 40s are ready to retire. Many retirement plans allow workers to reduce their current tax obligations by making contributions to a traditional IRA or 401(k).
The downside is that they will have to pay taxes on their retirement income after they have retired. It becomes a choice: Pay taxes now, or run the risk that taxes will have gone up by the time you retire. Tax increases an offset the upfront benefits of deductible income and potentially, even employer match.
Some retirement plans, such as a Roth IRA, enable contributions using your after-tax income. While it won’t reduce your tax obligations now, it can save you from worrying about paying taxes in retirement.
This can spare you from paying the likely increased income tax rates that will likely exist by 2054, when the national debt reaches 166% of the GDP.
Related: Last of Baby Boomers Turn 65 by 2030, but Many Struggle to Retire
