May 3, 2010

Traditional IRA contributions tumble

Ann Ficke won't contribute to her IRA this year, even though she did last year.

"It's about the last thing on my mind," she says. "With my job situation the way it is, I'm just trying to keep my house afloat."

Ficke, working in sales and a divorced mother of two, isn't alone. Almost 40 percent fewer Americans expect to fully fund their IRAs this year than in 2009, according to a survey from Putnam Investments. Only one in seven (14 percent) plan to fully fund their IRAs in 2010, versus 23 percent who fully funded an IRA in 2009.

The survey also found investors are not planning to convert from traditional IRAs to Roth IRAs, in spite of the new tax law change that allows higher-income investors to perform Roth conversions. Only 14 percent of respondents were considering converting some or all of their traditional IRA assets to a Roth IRA either this year or next, with a majority (56 percent) saying they definitely would not convert. Other findings from the Putnam research include:

  • Two-thirds of respondents (67 percent) said they are not confident that the taxes they would pay now because of a Roth IRA conversion will produce better results in the future. Nearly as many (61 percent) say they do not want to pay the taxes required by a Roth conversion because of previous investment losses, and 56 percent said they simply cannot afford the costs of a Roth IRA conversion.
  • Investor skepticism is underscored by the fact that two in five respondents (41 percent) think they will have more money in the long run if they pay taxes later with a traditional IRA rather than converting to a Roth IRA and paying taxes now (26 percent).
  • The lower IRA savings come even as three-fifths of the survey respondents (58 percent) report they are not saving more overall this year than last, even about the same number (62 percent) thinks their savings are unlikely to provide them with a sizeable retirement nest egg.

A lack of knowledge about both traditional and Roth IRAs could play a role in Americans' use of these investment vehicles.

"The economic turmoil of recent years has made clear to Americans the uncertainty of their prospects for a secure retirement," said Jeffrey R. Carney, head of Retirement and Global Products at Putnam Investments, in a statement. "They understand the need to save more, but are finding it difficult to do so, leaving them with a significant retirement income gap. Government, employers and the financial services industry need to continue to find new strategies to help workers increase their retirement savings through education, guidance and retirement income tools. Americans need to make the most of their IRAs, 401(k) plans and other savings vehicles that are built to provide significant contributions to their lifetime income."

More than one-quarter of survey respondents (26 percent) expect to use their tax refund this year to pay down debt, while 22 percent plan to save it for a rainy day and 11 percent expect to invest it in a retirement account. Fewer than one in 10 expects to splurge on a vacation, dinner or some other personal extravagance.

John Sullivan is editor-in-chief of Boomer Market Advisor and AdvisorBiz.com, part of Summit Business Media's Advisor Media Group.

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