Skip to main content

You are here

Advertisement

Source ‘Spots’

IRAs have been around a long time – as long as ERISA, in fact.[1. Originally designed as a means to provide workers who did not have employment-based pensions an opportunity to save for retirement on a tax-deferred basis, IRAs have undergone a number of changes over time. The Economic Recovery Tax Act of 1981 (ERTA) extended the availability of IRAs to all workers with earned income (including those with pension coverage), while the Tax Reform Act of 1986 (TRA ’86) brought with it some restrictions on the tax deductibility (and, in some cases, availability) of IRA contributions. A decade later the Taxpayer Relief Act of 1997 (TRA ’97) created a new type of nondeductible IRA — the Roth IRA — and allowed nonworking spouses to contribute to an IRA, subject to certain income restrictions.] Today, IRAs represent nearly $6 trillion in assets, approximately a quarter of the $23.7 trillion in retirement plan assets in the nation. As an account type, they currently hold the largest single share of U.S. retirement plan assets with — as retirement plan advisors will appreciate and a recent EBRI publication notes — a substantial (and growing) portion of these IRA assets having originated in other tax-qualified retirement plans. Recognizing not only the significant growth but the increasing importance of these accounts to individual retirement security, as retirement plan advisors are also aware, the Department of Labor has proposed expanding ERISA’s fiduciary protections to these accounts.

To help better understand the trends driving this critical retirement savings component, the EBRI IRA Database, an ongoing project that collects data from IRA plan administrators across the nation, was created. For year-end 2012, it contained information on 25.3 million accounts owned by 19.9 million unique individuals, with total assets of $2.09 trillion. The EBRI IRA Database is unique in its ability to track individual IRA owners with more than one account, thereby providing a more accurate measure of how much they have accumulated in IRAs.

Using that capability, a recent EBRI analysis[2. The May 2014 EBRI Issue Brief, “Individual Retirement Account Balances, Contributions, and Rollovers, 2012; With Longitudinal Results 2010–2012: The EBRI IRA Database,” is available online here.] notes that the average IRA account balance in 2012 in the EBRI IRA database was $81,660, while the average IRA individual balance (all accounts from the same person combined) was $105,001. Overall, the cumulative IRA average balance was 29% larger than the unique account balance, indicating that a number of individuals do, indeed, maintain multiple IRAs — perhaps both a Roth and traditional IRA, maybe established via a 401(k) rollover or by contributions, or SEP-IRAs. They may have been established at different points in time and at different financial institutions.

Looking to some of those differences, while almost 2.4 million accounts in the EBRI IRA database received contributions in 2012, compared with the 1.3 million accounts that received rollovers for that year, the amount added to IRAs through rollovers was 10 times the amount from contributions.

However, an annual-snapshot percentage of IRA contributions doesn’t show whether the same individuals were contributing over time or if different people contributed in different years. Taking advantage of the ability to look at multiple years across multiple accounts of individual owners across the EBRI IRA database, the report notes that while approximately 10% of traditional IRA owners contributed at some point during the 3-year period, only 6% contributed to their IRA each year. On the other hand, while approximately 25% contributed to their Roth IRA in any one year, 35% did so at some point over the 3-year period.

Looking at the pace of contribution activity, the EBRI analysis found that among those who contributed to their IRA in each of the 3 years, the pattern seemed pretty consistent: 12.1% did so in 2010, 13.2% in 2011 and 13.1% in 2012. Looking at the specific sources of those contributions, among traditional IRAs, we find that the percentage that contributed to them rose from 5.2% in 2010 to 6.6% in 2012 — but among Roth IRA owners, 24.0% contributed in 2010, 26.0% in 2011 and 25.1% in 2012.

Consider too that, among traditional IRA owners, only 3.0% contributed all 3 years, compared with 15.0% of Roth IRA owners who did so. Moreover, Roth IRA owners ages 25–29 were the most likely to contribute in any year and all 3 years (56.1% and 24.3%, respectively). Indeed, more than 4 in 10 (43%) Roth owners ages 25–29 contributed to their Roth in 2012.

Of perhaps greater interest to retirement plan advisors, the EBRI analysis found significant differences in the distribution patterns among older IRA owners, specifically those ages 70 or older, due to the required minimum distribution (RMD) rules. Of course, those rules require individuals to begin making withdrawals from traditional IRAs starting April 1 of the year following the calendar year in which they reach age 701/2. However, the RMD rules do not apply to Roth IRAs, a factor that likely explains the continued increases in account balances for Roth owners in that age group.

In sum, while the gross accumulations of retirement savings in IRAs provide value in terms of quantifying an increasingly significant component of the nation’s retirement security, a focus that takes into account only aggregate movements, or isolated account holdings, or that ignores the original source(s) of the money in the account and/or the accompanying restrictions, runs the risk of overlooking significant undercurrents.

Those undercurrents may provide advisors and those they serve a better understanding of the growth trends in this important savings vehicle, and ultimately explain how and when these retirement savings are withdrawn.

Footnotes

Advertisement