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Roth IRAs, TDFs Growing Among Younger Workers

Roth IRAs are growing in popularity, particularly among younger workers, and the use of target date funds in those plans is also rising, according to a new study from the Investment Company Institute (ICI).

While just 15% of traditional IRA investors are under the age of 40, 31% of Roth IRA participants are in that age group. The ICI report attributes the age gap to the rules that govern, and limit, the relative attractiveness of Roth IRAs for older workers; namely, the lower contribution limits compared to a traditional IRAs ($5,500 per year in a Roth for someone under age 50, versus $18,000 per year in a traditional IRA), and the fact that income tends to rise with age.

In addition, Roth 401(k) contributions have only been available since 2006, and the post-tax nature of the contributions favors those who may well be paying the lowest income tax rates of their working career now.

The study also found that those who do open a Roth IRA largely do so with contributions, a move the report’s authors attribute to the same rules requiring taxes on Roth rollovers to be paid upfront. As a result, 75% of Roth accounts were opened with a contribution, while just 11% of traditional IRAs were opened in the same fashion. Conversely, of the traditional IRAs established in 2013, 86% were done so with a rollover, compared to just 12% of Roth IRAs.

In 2010, when the rules were adjusted to allow the taxes on traditional-to-Roth plan conversions to be spread out over two years, while the income limits were removed, 33% of Roth accounts were opened through conversions, according to the report. The next year, the number of Roth plans opened in that fashion dropped to under 11%.

Rollovers from a Roth IRA are very rare; just 2% or less of all Roth investors made a rollover in a given year, according to ICI. And the study also found that withdrawals from those accounts are also rare, with just 4% of investors taking a withdrawal from their account in 2013.

While equity holdings comprise the majority of Roth IRA balances, comprising over 80% of the investments for Roth investors under age 50, target date funds are growing in popularity, particularly among younger investors. As of the end of 2013, target date funds comprised over 15% of the investment portfolios of Roth investors aged 34 or younger. Conversely, less than 1% of investments of Roth investors over age 70 were in TDFs.

To view the full survey, click here.

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