Individual retirement accounts (IRAs) were originally created in 1974 to provide those without workplace retirement plans a tax-deferred method of saving for retirement. Since then IRAs have become predominantly a depository for savings accumulated in 401(k) and similar defined-contribution workplace retirement plans.

Using data from the Internal Revenue Service, researchers at the Center for Retirement Research at Boston College found rollovers accounted for the overwhelming majority of the inflows into IRAs. There are several reasons why this is the case. The maximum deductible contribution to IRAs is lower than it is for defined-contribution plans. The 2017 limits for traditional and Roth IRAs are $5,500 (plus a $1,000 catch-up for those ages 50 or older.) The 2017 limits for 401(k) and similar plans are $18,000 (plus a $6,000 catch-up.) Some workers find it easier to rollover their workplace savings to an IRA when switching jobs than switching it to a new workplace retirement plan. Others prefer the control and greater choice of investments that an IRA provides. There are also income restrictions on who can make contributions to IRAs.

This isn’t to say people aren’t contributing directly to IRAs. Quite the contrary: 14% of U.S. households made contributions in 2014. Their contributions accounted for just 13% of all new money flowing into IRAs, however. Direct contributions were closely split between traditional and Roth IRAs (35% and 36% of total contributions, respectively.) Employer-sponsored IRAs accounted for 10% of contributions with the remainder going into “more than one type.” The study’s authors note that when employer-sponsored programs are excluded, Roth IRAs tend to be more popular. They attribute the popularity of Roth IRAs to the higher income caps on who can contribute.

Overall, and not surprisingly, higher income earners are more likely to contribute to IRAs. The average household earnings of contributors in 2011 (the most recent such data available) was $110,000 versus $70,000 for non-contributors. IRA contributions tended to be better educated and more likely to contribute to a 401(k) plan as well. Married individuals in two-earner couples also tended to be more likely to contribute, though there is also a group of one-earner “frugal breadwinner” households that contribute.

Source: “Who Contributes to Individual Retirement Accounts?,” Anqi Chen and Alicia Munnell, Center for Retirement Research at Boston College, April 2017, Number 17-8.

Related

Portfolio Strategies

Converting to a Roth IRA Can Minimize RMDs

Dispatches

Be Aware of IRA Rollover Rules

Financial Planning

How to Decipher Your 401(k) Plan Statement