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Importance of IRAs, Rollovers Growing

IRAs play an increasingly large and important role in bolstering retirement readiness, says a recent analysis — and rollovers are a critical part of that vitality. It further reports that while contributions absent rollovers may be infrequent, so are withdrawals.

In the December 2017 ICI Research Perspective, Investment Company Institute Senior Director of Retirement and Investor Research Sarah Holden and ICI Retirement and Investor Research Division Associate Economist David Schrass discuss research concerning IRAs and how they are being established and used.

Bigger Slice of the Pie

The IRA slice of the retirement pie is larger than it was in earlier servings. It amounted to $8.4 trillion at mid-year in 2017, which is almost one-third of all U.S. retirement assets — and 12 percentage points higher than 20 years ago. Not only that, say Holden and Schrass, by the end of the second quarter of this year, almost 44 million U.S. households — 35% of all U.S. households — owned IRAs and the assets in them accounted for 11% of all U.S. household assets.

And IRAs are an increasingly important supplement to employer-sponsored retirement plans, Holden and Schrass argue; by the middle of 2017, more than 80% of the households with IRAs also participated in such plans. And some households — 6% of them — have employer-sponsored IRAs, including SEP IRAs, SARSEP IRAs and SIMPLE IRAs.

On a Roll

The IRA snowball has been growing as it careens down the retirement mountainside, especially due to rollovers. “From their inception, traditional IRAs have been designed so that investors could accumulate retirement assets either through contributions or by rolling over balances from employer-sponsored retirement plans,” they write. “In addition to being a repository for contributions, the traditional IRA is a vehicle for rollovers from employer-sponsored retirement plans.” And they note that rollovers have been behind the recent growth in IRAs. How important has that been? They cite these statistics:

  • among households with rollovers in their traditional IRAs, 54% had only rollover IRAs and never made traditional IRA contributions at all;

  • almost 90% of traditional IRA-owning households with rollovers made their most recent rollover in 2000 and later, including 59% whose most recent rollover was within the past seven years;

  • households transferred $424 billion from employer-sponsored retirement plans to traditional IRAs in 2014; and

  • in mid-2017, about 20 million U.S. households — 57% of all US households owning traditional IRAs — had traditional IRAs that included rollover assets, and 82% of these households transferred the entire retirement plan account balance into their IRAs.

Stingy Holders

Not only that, rollovers have outstripped other sources as an engine of IRA growth. The ICI found that overall, in 2016, just 12% of U.S. households contributed to traditional IRAs and Roth IRAs; in the last decade, there have never been more than 14% of U.S. households that have done so. In addition, very few households that could do so made catch-up contributions to IRAs in 2016.

More households that have traditional or Roth IRAs make contributions to their IRAs, but even among that group, fewer than 40% have done so in the last three years: 39% in 2014, 36% in 2015 and 37% in 2016. ICI found that more Roth IRA owners made contributions than traditional IRA owners: in 2016, 39% of those with Roths and 25% of those with traditional IRAs. But holders of both kinds of IRAs generally were not inclined to making catch-up contributions in 2016.

But while they are may not be inclined to make contributions, IRA holders also generally are reluctant to withdraw money from them. Most withdrawals, Holden and Schrass say, “were infrequent and mostly retirement related,” and just over 80% were made by retirees. And those who made withdrawals controlled themselves, too — 71% of them took only the required minimum distribution.