Table 7 shows financial characteristics median dollar amounts for households with and without IRAs and with and without pension coverage. Households that had both pension coverage and IRAs were the wealthiest group in the measures of median retirement assets, total assets, and net worth.
This group also had higher median debt than the other groups. Table 8 provides a demographic breakdown of IRA owners, grouped by their pension coverage. In nearly every category, IRA ownership was higher among households with pension coverage. IRA ownership increased with income for both households with and without pension coverage although households with pension coverage did not have higher IRA ownership rates in all income groups.
Within income groups, there is not a clear pattern of IRA ownership between households with and without pension coverage. The Survey of Consumer Finances data show that for both households with and without pension coverage IRA ownership increased with age until age Households in which the head was aged 70 or older had lower rates of IRA ownership than those aged 60 to Among households in which the head was under the age of 30, the rate of IRA ownership was By comparison, among households in which the head was aged 60 to 69, the rate of IRA ownership was 1.
IRA ownership rates were lower among households in which the head of the household did not have a college degree. The difference was particularly large among households without pensions: the rate of IRA ownership for households without pension coverage and in which the head had some college education was less than half the IRA ownership rate for households without pension coverage but in which the head had a college degree This may indicate a willingness to trade current income for larger future income, as college students generally forgo at least some current income while anticipating higher income in the future.
Contributing to an IRA is a similar decision, as IRA owners forgo current income in exchange for larger income in retirement. The IRA ownership rate was Some of these groups may be particularly economically vulnerable, as they likely have few assets and may need to rely on Social Security for most of their retirement income. IRA ownership rates were higher among homeowners than non-homeowners.
Low IRA ownership rates among non-homeowners Homeownership rates increase as household income and age increase. In addition, homeownership may be a proxy for long-term planning or higher levels of financial literacy, both of which are associated with higher IRA ownership rates.
Married households had higher IRA ownership rates than single households, although the difference was not as pronounced among households without pension coverage. It is interesting to note that IRA ownership rates were only one percentage point higher among single male households compared with single female households.
Household o wns h ome. Household d oes n ot own h ome. Income is reported for the entire household. Individuals vary in their preferences for saving. Some individuals may be quite willing to give up current consumption in order to receive higher consumption in the future. Other individuals may be less willing to make this trade-off.
Individuals who have a high preference for saving may be more likely to own IRAs. Table 9 presents IRA ownership rates in combination with factors that indicate attitudes toward saving. The Survey of Consumer Finances asks respondents a number of questions to elicit their attitudes toward saving. The answers might provide insight into saving propensities, which might be an important factor in determining which households own IRAs.
Three questions in the survey related to saver type: 1 the household's most important reason for saving, 2 the most important time period in planning the family's spending and saving, and 3 the amount of shopping around to find the best terms when making saving and investment decisions.
Among both households with and without pension coverage, households that have higher propensities to save have higher IRA ownership rates. Among households without pension coverage, IRA ownership rates increase substantially as households increase their savings horizon from less than one year to a savings horizon of two to 10 years from This suggests that efforts to increase financial literacy among less financially literate households may lead to higher IRA ownership rates.
Analysis of the data presented in this report suggests that pension plan coverage is an important factor for determining whether a household owns an IRA. IRA ownership is not as widespread among households without pension coverage, yet these are the households that IRAs are targeted to help. Some policymakers have expressed concern that many workers have inadequate savings for retirement.
In some cases, these workers may have less wealth than they anticipated to enjoy retirement. Some of these households may have to rely on public assistance to meet their basic needs.
To formulate more effective retirement savings policies, policymakers need to be aware of how IRA ownership is affected by factors such as pension coverage, education, income, and behavior e. An issue for policymakers is how to encourage workers to better prepare for retirement, particularly when they may have other, more immediate financial concerns.
Retirement security is often thought of as a three-legged stool: Social Security, private savings, and employer-provided pensions.
Although participation in Social Security is mandatory for most workers, the other legs have traditionally been voluntary, though encouraged through tax incentives. For example, employer contributions to pension plans are a tax-deductible expense; participants' contributions to defined contribution plans are not included in current taxable income; contributions to traditional IRAs may be tax-deductible; and qualified distributions from Roth IRAs are not taxed.
Current tax incentives, however, may not be effective for some target populations. Several policy proposals have been suggested to help workers better prepare for retirement. The Retirement Savings Contributions Credit the Saver's Credit is an additional incentive to encourage lower-income households to save for retirement. IRS data indicates that 5. Table 10 indicates that the credit may not be widely used: 5. Several factors may limit the effectiveness of the Saver's Credit: 1 it is non-refundable, so households with little or no tax liability receive little or no benefit; 2 it is not available to individuals who file their taxes using form EZ; and 3 the credit may be used by individuals who would have made retirement plan contributions in the absence of the credit.
Thus, not all retirement plan contributions tied to the credit are "new" contributions. Because current tax and other incentives have not substantially increased voluntary participation in the retirement savings system, some policymakers believe that IRA ownership rates could be raised through increased access to retirement accounts.
One of the challenges is determining how to comprehensively provide retirement accounts to workers who do not have employer-sponsored pension plans. The success of automatic enrollment in k plans has prompted calls for an automatic enrollment program for IRAs. The employer would direct a specified percentage of each employee's pay into the IRA.
Eligible employees would automatically be enrolled by their employers in the Auto IRA program, but could opt-out of participation or change the amount of their contribution.
Employers could, but would not be required to, match their employees' contributions. Although approximately Some households might work for employers that are small enough to be exempt from offering Auto IRAs or some households might not meet job tenure requirements.
An Auto IRA program for most workers without pension coverage could be costly to implement and administer, as millions of individual accounts would likely need to be processed.
One goal of Auto IRA proponents is to minimize employers' administrative burdens and fiduciary obligations. For example, there may be questions about which default investments are appropriate for workers that do not make active participation decisions.
Among households that do not have an employer-sponsored pension plan, and therefore would be potentially eligible for the Auto IRA, While individuals could opt out of the Auto IRA, the possibility exists that some individuals may inadvertently exceed the yearly IRA contribution limit. It is estimated that , taxpayers exceeded the contribution limit in Efforts to improve financial literacy may increase IRA contributions and ownership rates by increasing knowledge of the benefits of IRAs, the Saver's Credit, and the option to have federal income tax refunds deposited directly to IRAs.
Many government agencies, non-profit groups, and for-profit companies have ongoing campaigns aimed at improving financial literacy for example, increasing awareness of credit card fees. In particular, some of these efforts focus on the importance of saving for retirement. Small differences in the amount of fees that financial institutions charge for managing IRAs can yield large differences in the account balances at retirement.
Some policymakers have expressed concern regarding the fees that financial institutions charge k plan participants. Legislation has been introduced that would increase k plan sponsors' and participants' awareness of the fees that they pay. The Department of Labor recently issued an interim final rule that would require greater transparency of fees paid in k plans.
One difference between IRAs and k plans is that IRA owners have complete control over the choice of the financial institution and investments. However, individuals may find the decisions associated with opening and maintaining IRAs complicated and perhaps overwhelming. This suggests that opportunities may exist for financial institutions to charge higher fees than necessary. A direct comparison of IRA and k fees is not possible because of the different structures of the plans. IRAs are likely administratively costly, as each separate account requires separate record keeping, whereas k plan administrators can take advantage of economies of scale.
Other types of defined contribution retirement accounts include b plans offered by charitable and educational employers, plans offered by state and local governments, and the Thrift Savings Plan TSP offered by the Federal government. For more information on current laws on IRAs, see U. For more information, see U. Individuals are considered covered by a pension plan if contributions have been made to a defined contribution plan in the tax year or if they are eligible to participate in a defined benefit.
Individuals are not considered covered by a pension plan if they are only covered under Social Security, Railroad Retirement, or if the only reason for their participation in a pension plan is because they are reservists or volunteer firefighters. See 26 U. Withdrawals that represent non-deductible contributions do not have to be included in income because doing so would subject the contributions to double taxation since income used to make non-deductable contributions is taxed when the income is earned.
Some of the exceptions to the early withdrawal penalty include distributions for higher-education expenses, purchase of a first home, or if the individual becomes disabled.
The percentage is based on the individual's life expectancy according to IRS-approved mortality tables. Keogh plans, also known as H. See Budget of the United States , Table 16—1. The threshold at which phase-out for the deduction begins depends on the filing status and pension coverage of the taxpayer and the spouse's pension coverage.
The IRS publishes detailed tax data from Form Each survey interviews different households to provide separate cross-sections of data. The SCF uses the household as the unit of analysis as assets such as homes and bank accounts are often jointly owned by married couples. Gale and John Karl Scholz. Approximately 5. These percentages are calculated from data in Table 2.
Approximately ICI includes households in which neither the head of the household nor the spouse were working. This report focuses on IRA ownership among households in which either the head or the spouse were working at the time of the survey. Households in which neither the head of the household nor the spouse were working would not be able to contribute to either a traditional or Roth IRA. The SCF indicates that in , of the million working and non-working households in the United States, 35 million Households in which neither the head of the households nor the spouse were working could still own IRAs as a result of contributions made in previous years.
The analysis of data in this report emphasizes medians rather means or simple averages. The median is the middle value of a series of numbers, such that half the values are above the median and half are below the median. Many financial variables are skewed; that is, some individuals or households report very large values. In such cases, median values may be better representative of data series than average values; average values are influenced by a few very large values.
Amounts in traditional and Roth accounts may not be directly comparable. Amounts withdrawn from traditional IRAs generally must be included in taxable income, so traditional IRA account balances generally overstate the amount available for spending after taxes are taken into account.
Roth IRA withdrawals are not included in taxable income. Individuals are considered covered by a pension plan if contributions have been made to a defined contribution plan in the tax year or if they are eligible to participate in a defined benefit plan.
Non-IRA retirement assets are mainly k and other thrift accounts. Total assets are financial assets and non-financial assets. Financial assets are mainly saving and checking account, stocks, bonds, and savings bonds.
Non-financial assets are mainly housing, vehicles, and business interests. This difference may not be surprising given that the sample excludes households where neither the head nor spouse were working.
Most households in which the head is aged 70 or older were retired and therefore not included in tabulations for this report. In the th Congress, Rep. Earl Pomeroy introduced H. Kirsten Gillibrand introduced S.
These bills would have expanded eligibility for the Saver's Credit and make the credit refundable. In addition, H. In automatic enrollment defined contribution plans, new employees are deemed to be participating in the pension plan, so eligible participants must opt-out rather than opt-in to the plan.
Participation may include employee and employer contributions to the account. In the th Congress, Sen. Jeff Bingaman introduced S.
Richard Neal introduced companion legislation, H. Mark Irwy and David C. The SCF indicates that Topic Areas About Donate. Investors in IRAs can choose from a wide range of financial products, including stocks, bonds, exchange-traded funds ETFs , and mutual funds.
There are even self-directed IRAs that permit investors to make all the decisions and give them access to a broader selection of investments, including real estate and commodities. Only the riskiest investments are off-limits. Each has different rules regarding eligibility, taxation, and withdrawals. Choices include banks, brokerage companies, federally insured credit unions, and savings and loan associations. There are some notable exceptions for withdrawals for educational expenses and first-time home purchases, among others.
If your IRA is a traditional account rather than a Roth account, you will owe income tax on an early withdrawal. Income from interest and dividends, Social Security benefits or child support does not count. The following is a breakdown of the different types of IRAs and the rules regarding each:. In most cases, contributions to traditional IRAs are tax-deductible. However, when the money is withdrawn, it is taxed at your ordinary-income tax rate.
For , the IRS changed the income phaseout range for deducting contributions to a traditional IRA for investors with retirement plans at work. Your income determines whether you can deduct your traditional IRA contributions. Suppose you are a single person or file as head of household and have a retirement plan, such as a k or b , available at work. From there, you begin to lose deductions as your MAGI increases. Use this chart to figure out where you fit.
Roth IRA contributions are not tax-deductible, but qualified distributions are tax-free. You contribute to a Roth IRA using after-tax dollars, but you do not have to pay any taxes on investment gains. When you retire, you can withdraw from the account without incurring any income taxes on your withdrawals. If you don't need the money, you don't have to take it out of your account. You can still contribute to a Roth IRA as long as you have eligible earned income, no matter how old you are.
However, there is a catch. There are income limitations for contributing to a Roth IRA. Self-employed individuals such as independent contractors, freelancers, and small-business owners, can set up SEP IRAs.
The acronym SEP stands for simplified employee pension. However, the employees cannot contribute to their accounts, and the IRS taxes their withdrawals as income.
All the contributions are tax-deductible, potentially pushing the business or employee into a lower tax bracket. Should shares be sold in a non-retirement account, followed by substantially identical shares purchased in an IRA within a day period, the investor cannot claim tax losses for the sale. The investment's basis in the individual's IRA won't be increased either.
Starting at age 72, holders of traditional IRAs must begin taking required minimum distributions RMDs , which are based on the account size and the person's life expectancy. A person of any age with earned income can now contribute to an IRA.
Use the chart below to get a better sense of how the different IRAs work. Note: To view the full chart, use the slider at the bottom to see the column at the far right. A traditional IRA gives you an immediate tax benefit: The amount you deposit is deductible from your gross income that year, up to annual limits.
You'll owe income taxes on the money only after making a withdrawal. If you have a Roth IRA, you pay income taxes that year on the amount you contribute. You won't owe any taxes down the road when you withdraw the money. Yes, but you must be sure that the combined contributions to all your IRAs do not exceed the annual limits set by the IRS. If you have a k plan through an employer, you can even contribute to both the k plan and an IRA. Just stay within the total limit for the year.
That said, there are allowable withdrawals for certain expenses, like a first-time home purchase or educational expenses. Your choice is vast, with banks, investment companies, and brokerages all vying for your business. Each will offer a selection of IRA accounts, each made up of a mix of investments that may include mutual funds, stocks, exchange-traded funds ETFs , bonds, and more. You also have the option of opening a self-directed account that allows you to make all the investment choices.
The IRS forbids only the riskiest types of investments like collectibles and precious metals. All IRA accounts require a named beneficiary. If you die before your IRA assets are exhausted, they will pass to your beneficiary. For a married couple, the beneficiary is the holder's spouse, unless the spouse agrees in writing that another beneficiary is named.
If the beneficiary is under retirement age, they will be subject to the same IRA distribution and withdrawal rules. Internal Revenue Service. Accessed Nov. Roth IRA. Retirement Planning. Income Tax. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page.
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