Two new reports find a generation gap of sorts in IRAs and IRA investments.
The reports from the Investment Company Institute (ICI) noted that Roth IRA investors tend to be younger than traditional IRA investors, and – perhaps on a related note, they also tended to have a much higher allocation to equity investments.
The report notes that, at year-end 2014, nearly a third (31%) of Roth IRA investors were younger than 40, compared with 15% of traditional IRA investors. Additionally, while just 24% of Roth IRA investors were 60 or older, 39% of traditional IRA investors were in that age bracket. The ICI report says that the younger age distribution reflects in part the rules governing access to Roth IRAs, including income limits on contributions and (until 2010) on conversions, as well as prior limitations on rollovers into Roth IRAs, which have been eased recently.
Roth IRA investors also tend to have higher equity holdings than traditional IRA investors. At year-end 2014, nearly 80% of Roth IRA assets were invested in equity holdings, compared with less than two-thirds of traditional IRA assets. The ICI report notes that two-thirds (66%) of Roth IRA assets were invested in equities and equity funds, compared with 55% of traditional IRA assets. The report acknowledges that some of the difference in allocation to equity holdings reflects the different age distributions, as Roth IRA investors are younger, and younger investors typically weight their portfolios more heavily toward equity investments than older savers.
‘Open’ Doors
ICI’s research shows that traditional IRAs tend to be opened with rollovers, whereas Roth IRAs tend to be opened with contributions. The reports also demonstrate that withdrawal activity is lower, equity holdings are higher, and investors end to be younger in Roth IRAs than in traditional IRAs.
The research, drawn from the IRA Investor Database, also noted that most (85%) of new traditional IRAs in 2014 were opened only with rollovers and nearly half of traditional IRA investors with an account balance at year-end 2014 had rollovers in their traditional IRAs. By contrast, rollovers play a less important role in Roth IRAs, with only about one in 15 Roth IRA investors at year-end 2014 having rollovers in their Roth IRAs. Rather, contribution activity plays a more important role in Roth IRAs, with nearly three-quarters (74%) of new Roth IRAs opened only through contributions in tax year 2014.
RMD Draws?
While undoubtedly a function of tax law that requires investors aged 70½ or older to take required minimum distributions (RMDs), withdrawals were much more common among traditional IRAs than Roths, which have no RMDs (unless the Roth IRAs are inherited). In 2014, just 4% of Roth IRA investors made withdrawals, compared with 23% of traditional IRA investors. The report notes that early withdrawal penalties can apply to both Roth and traditional IRA investors aged 59½ or younger, and withdrawal activity is lower among investors younger than 60 compared with investors aged 60 or older.
The updated reports, titled “The IRA Investor Profile: Traditional IRA Investors’ Activity, 2007–2014” and “The IRA Investor Profile: Roth IRA Investors’ Activity, 2007–2014 ,” use data from The IRA Investor Database. For year-end 2014, The IRA Investor Database has more than 16 million IRA investors.
