Older Workers Investing More in IRAs

Individual retirement accounts (IRAs) have grown in popularity among U.S. households and older, higher income Americans.

Individual retirement accounts (IRAs) have grown in popularity among U.S. households and in particular among older, higher income Americans. According to a survey, approximately 42.6 million U.S. households (33.4%) reported owning IRAs in 2018, compared with 22.2 million households (21%) two decades ago. This represents households that may own more than one type of IRA, including traditional IRAs, Roth IRAs, and employer-sponsored IRAs (SEP IRAs, SAR-SEP IRAs, and SIMPLE IRAs). Further, 68% of IRA-owning households were headed by someone age 45 or older, and 45% of U.S. households with a household income of $50,000 or more owned IRAs.

The Investment Company Institute (ICI) analyzed the results of the Annual Mutual Fund Shareholder Tracking Survey and the IRA Owners Survey to uncover the role of IRAs in how U.S. households save for retirement.

The pattern identified in the study reflects the “life-cycle effect” on saving: Households tend to focus on retirement-funded saving as they age and ownership tends to increase with more household income.

Traditional IRAs were designed so that investors could accumulate money for retirement through income contributions or by rolling over savings from employer-sponsored retirement plans. Asset rollover from employer-sponsored plans has grown participation in IRAs, accounting for $460 billion in transferred assets from employer-sponsored accounts to traditional IRAs in 2015. Approximately 43% of U.S. households made some contribution toward their IRAs other than a rollover.

Of households surveyed that owned traditional IRAs in mid-2018, 26% reported taking withdrawals in tax year 2017, the same percentage as in tax year 2016. According to the study, most withdrawals were taken to fulfill required minimum distributions (RMDs). In tax year 2017, 72% of households with traditional IRAs made calculated withdrawals based on the RMD. The remainder of traditional IRA owners made withdrawals as lump sums based on needs (16%) or as a scheduled withdrawal amount as a percentage or regular dollar amount (7%).

Source: “The Role of IRAs in US Households’ Saving for Retirement, 2018,” by Sarah Holden and Daniel Schrass; Investment Company Institute, December 2018.