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IRAs: An Untapped Resource

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Individual retirement accounts (IRAs) have been around for years, but many taxpayers still fail to take advantage of the accounts, according to a recent study by the Employee Benefit Research Institute (EBRI). In 2007, total assets in IRAs grew 12.5 percent to a record $4.75 trillion, the fifth consecutive year of double-digit IRA growth. The study in the September 2008 EBRI Notes, includes the following points:

o Total IRA assets in 2007 were larger than those in other retirement plan types. Private-sector defined-contribution plans held $3.49 trillion, and private-sector defined benefit plans held $2.33 trillion in 2007.

o Rollovers from other types of retirement plans continue to fuel IRA growth, not new contributions.

o A large shift in market share has taken place over the past quarter-century in IRA assets, with mutual funds and brokerage accounts now dominant. Mutual funds held 47 percent of IRA assets in 2007, followed by brokerage accounts (38 percent), life insurance companies (8 percent) and banks/thrifts (7 percent).

o Traditional IRAs hold the most assets, amounting to about 90 percent of all IRA assets (traditional IRAs are taxable on withdrawal). But most new contributions are going into Roth (untaxed at withdrawal) and other types of IRAs.

The study also reveals a surprising piece of information: only roughly 10 percent of taxpayers who were eligible contributed to IRAs each year from 2000-2004. The average contribution for those contributing was approximately $2,400 in both 2000 and 2001, before the contribution limits increased in 2002. In 2002, the average contribution jumped to $2,894, and in 2004 it rose to $3,324.

This low participation rate underscores how IRAs have become primarily a holding vehicle for assets that are employees are transferring from employment-based retirement plans instead of using the accounts for new retirement savings. The rate also exposes an opportunity for financial advisors.

“The main point (of the findings) for financial advisors is to be aware that most of the money for IRAs results from job change,” says Craig Copeland, a senior research associate at EBRI. “If they are working with a client, one of the client’s biggest decisions for their financial well-being in retirement is what they do with their retirement savings upon a job change.

“The second point,” he explains, “is that there are a lot of potential tax savings that are not being used. Certainly the Roth IRA is a unique product that allows you to avoid taxes on your returns when you make withdrawals at retirement. That product is not being taken advantage of by many Americans who could.”

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