IRAs Fall Short of Original Goal
Nearly 8 trillion dollars sits in Individual Retirement Accounts, or IRAs. This is nearly half of all the value held in the U.S. retirement system, which also includes employer pension funds and 401(k)s.
A big reason IRAs were created in 1974 under the Employer Retirement Income Security Act (ERISA) was to give individuals not covered by retirement plans at work an opportunity to save in their own tax-deferred accounts.
So, are IRAs helping these workers?
IRAs “have drifted very far from their original intent” of helping those who need them most, researchers for the Center for Retirement Research conclude in a new study.
Who is eligible to receive tax benefits for saving in an IRA has morphed over the years since ERISA’s passage, but the original description is still relevant to millions of Americans: about half of U.S. private-sector workers today do not have a tax-exempt retirement plan at work. Low-income workers are even less likely to have one.
To determine who benefits from IRAs today, the researchers first tracked down the source of the trillions of dollars held in IRAs. Only 13 percent of the money that flowed into IRAs in 2014 was from people putting new savings into these accounts. The rest was from rollovers of funds accumulated in employer 401(k)s, which usually occur when a worker retires or changes job. (ERISA did delineate rollovers as a second purpose of IRAs.)
So what types of people are contributing new money? This is the critical question, because it became clear after ERISA’s enactment that IRAs had quickly become a popular tax shelter for high-income taxpayers. In 1986, Congress tried to limit this use by capping or eliminating tax-deductible contributions to IRAs among workers who already have a retirement plan at work and have earnings above specified income limits. In 1997, a new type of IRA was created, the Roth IRA; Roths also have income limits, which are the same regardless of whether or not one’s employer offers a retirement plan.
The researchers found that active contributors today to IRAs – both traditional IRAs and Roths – have household earnings that average $110,000. They also tend to be white (86 percent of contributors), have a college education (61 percent), and participate in their employer’s 401(k) (53 percent).
A second analysis sharpens the profile.
One group of IRA contributors is “super savers,” which are households with two workers earning fairly high combined incomes (nearly $150,000 per year, on average) who are also saving money in their employer 401(k)s. A second group, called “frugal breadwinners,” consists of middle-income individuals or middle-income households in which one person works – the majority of them also contribute to a 401(k). The third group is made up of successful, self-employed entrepreneurs who apparently use IRAs as their primary retirement savings account – their average incomes exceed $140,000.
The people saving new money in their IRAs – a minority of all IRA owners – are not primarily the people these accounts were designed to serve.
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