Individual retirement accounts may cumulatively hold close to half of private retirement assets, but that doesn't mean that IRAs are as broadly used by multiple segments of the population as they could be—nor does it mean that people are actively contributing to them.
In fact, according to a brief from the Center for Retirement Research at Boston College, nearly all IRA asset growth is instead driven by rollovers from employer-sponsored retirement plans. Individuals' contributions represent just 13 percent of the new money flowing into IRAs each year.
While IRAs were intended to give those without an employer plan access to a tax-deferred savings vehicle, the report says, it hasn't quite shaken out that way. Only 14 percent of households contribute to IRAs, and they're mostly made up of higher-income dual-earners who also save in a 401(k); moderate-income singles or one-earner couples, often with a 401(k); and higher-income entrepreneurs with no current 401(k).
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After it was found that IRAs were being used primarily by higher-income people, eligibility was restricted by the Tax Reform Act of 1986 to make contributions to IRAs fully tax deferred only for those who were not active participants in an employer-sponsored plan or whose adjusted gross income (AGI) fell below certain thresholds. Subsequently, Roth IRAs, which are not tax deferred, came into being with the Taxpayer Relief Act of 1997.
Most IRA assets, the study finds, come from 401(k) rollovers from employer-sponsored retirement plans rather than from individual contributions. So the original purpose of the IRA is not really being utilized by the vast majority of those whom it was intended to help.
IRA contributors, says the study, are more likely to be white, have a college education, and currently contribute to a 401(k). They also, on average, have higher household earnings. In addition, 14 percent of IRA contributors are self-employed, compared with just 9 percent of noncontributors.
The study concludes that IRAs, as currently used, "have drifted very far from their original intent of providing tax-preferred retirement saving for those without an employer plan. These vehicles currently do little to encourage retirement saving, but rather serve as the landing place for assets originally accumulated in 401(k) plans."
Therefore, to transform them back into an active savings vehicle, it recommends that people without an employer plan be automatically enrolled into IRAs with the ability to opt out. While ideally that would be "a federal government initiative," in the absence of federal action, it notes that states are taking their own actions.
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