New study shows few IRA accountholders contributing new dollars

New study: Few IRA owners contributing new money

DES MOINES, Iowa — Individual retirement accounts hold more than a quarter of all retirement assets in the United States — about $4.2 trillion. To put that in perspective, that’s almost 10 percent of the financial assets owned by all U.S. households. Yet only a small percentage of accountholders contribute new money to them, according to a new study released Tuesday by the Investment Company Institute.

The study shows just 9.4 percent of investors in traditional IRA accounts added contributions in 2008, down from the 11.2 percent in 2007. The data used for this study focused on account totals in 2007 and 2008, ICI said.

The IRA was created by Congress in 1974 as a way to set aside a portion of income free of taxes for retirement and as a place of workers to roll over their 401(k) accounts when they leave their jobs, so that they can consolidate various accounts.

The study’s author, Sarah Holden, ICI’s senior director of retirement and investor research, said about two-thirds of IRA owners have other retirement accounts such as a 401(k) at work and likely contribute to them first. Others may just consider the IRA a place to roll over their 401(k) account from work when they leave and don’t put additional money into it.

The ICI, a trade group for the investment industry, released details of the study of IRA investor accounts to learn about who owns them, and their level of contribution and withdrawal behavior.

Information about IRAs historically has been obtained through tax records and surveys. This study will supplement that information with accurate dollar amounts from 10 million IRAs.

The identities of individual investors were encrypted and not released to the researchers.

Understanding the behavior of retirement account investors is an important step to helping people save enough for retirement because larger numbers of retirees rely on their own savings rather than a pension.

The Employee Benefit Research Institute says the percentage of workers with pensions is around 11 percent, down from more than 60 percent in the 1970s. Workers relying on setting aside a portion of their own income in an employer sponsored 401(k) or similar program exceeds 60 percent, up from just 16 percent in the mid-1970s.

The IRA owners who actively contribute seem to be committed to it, Holden said. The study shows about 63 percent of those who contributed in 2007 also put in new money in 2008, even though the economy and the stock market wasn’t faring too well that year.

Among those contributors, about 60 percent put in the maximum allowed by the IRS, which was $4,000 for those under age 50 and $5,000 for those 50 and older.

The IRA market has grown rapidly in the last decade.

About 46 million households — that’s four out of 10 — have an IRA.

In 1999, IRA assets were $2.7 trillion, about 23 percent of all retirement assets. By 2009 assets had grown to $4.2 trillion, just over 25 percent of retirement assets.

The ICI plans to release additional findings from its research throughout this year.

Its next report will reveal more details about rollover activity. Most of the money going into IRAs comes from workers depositing or “rolling over” their 401(k) account balances when they leave a job. It’s not uncommon for some workers pull some of the cash out of their retirement fund as they roll it over. This is called leakage in the industry and it is a concern because many workers don’t save enough. When they’re tempted to pull cash out of their retirement savings, it may leave them short of money in retirement.

Other reports will focus on how much money is withdrawn from IRA accounts before retirement age, even though there is a penalty and taxes due on early withdrawals and how IRA investors allocate their money among stocks, bonds and other investments.

The ICI, which teamed with the Securities Industry and Financial Markets Association, a trade group for securities firms, banks and asset managers, said it hopes to increase public understanding of IRA investors through the research.