Roth IRA balances grew by more than double the rate of traditional IRAs from 2010 to 2012, increasing 16.6% compared with 7.9% for consistent owners of traditional IRAs, according to the Employee Benefit Research Institute.
What’s more, EBRI’s study, “Individual Retirement Account Balances, Contributions, and Rollovers, 2012; With Longitudinal Results 2010–2012: The EBRI IRA Database,” released Wednesday, found that rollovers overwhelmingly outweighed new contributions in dollar terms. While almost 2.4 million accounts received contributions, compared with the 1.3 million accounts that received rollovers in 2012, 10 times as much was added to IRAs through rollovers, compared with contributions, the study found.
Looking at individuals who maintained an IRA account over the three-year period, Washington-based EBRI found in its report that the overall average balance increased each year — from $95,431 in 2010 to $95,547 in 2011 and to $106,205 in 2012.
The increase occurred across each owner age group and IRA type, EBRI found, except for owners ages 70 or older (who must start withdrawing a minimum amount each year from traditional IRAs) and for traditional IRA owners whose balances originated as a rollover from another tax-qualified retirement plan, such as a pension or 401(k).
IRA guru Ed Slott says that EBRI’s study shows that the tax law beginning in 2010 that repealed the income restrictions on Roth IRA conversions — allowing everyone to convert their IRAs to Roth IRAs regardless of income — is contributing to the “surge” in Roth IRA balances.
The 2010 tax law “brought higher income people into the Roth conversion arena with larger IRA balances to convert. These people also had the money to pay the conversion taxes,” Slott told ThinkAdvisor. “Before 2010 you could not convert if your income exceeded $100,000. Once that rule was gone, the floodgates opened up for Roth conversions — especially large Roth conversions.”
Adding to the boost in 2010 Roth conversions, Slott says, was a “sweetner” — the so-called “two-year deal” in which “no Roth conversion income had to be reported in 2010 and you could spread that conversion income over two years (2011 and 2012).” This, he says, “effectively gave taxpayers an interest-free loan to build a tax-free savings account — all the gains in the Roth would be tax free, even before the tax was paid! That was a sweet deal, and that is a big reason for the huge bump in Roth IRA balances, especially in 2010.”
Another attractive quality of Roth IRAs is that they have no required minimum distributions like IRAs do, Slott adds, “and people like that too” because “they can keep their Roth IRA money growing tax free forever without ever being forced to withdraw it. Roth IRA converters (especially the new ones in 2010 that had the income and assets to pay the conversion tax) decided that paying the tax up front was worth the benefits and not having to worry about future higher taxes.”
Says Slott: “The Roth IRA removes the uncertainty of what future higher tax rates might do to retirement savings.”
As to EBRI’s finding that rollover amounts exceeded contributions, Slott says “that makes sense since IRA contributions are limited by law to $5,500 per year ($6,500 if 50 or over), but rollovers are unlimited.”
Roth conversions are rollovers, he adds, “as opposed to Roth contributions, which are subject to the annual limits.”
Another reason rollovers increased: Demographics — baby boomers [are] leaving jobs, retiring and rolling their 401(k) balances to IRAs. These are generally large balances,” Slott says.