Contributions appear to be the leading funding source for Roth individual retirement accounts, according to a new Investment Company Institute report.
In 2012, more than seven in 10 new Roth IRAs were opened exclusively with contributions — in sharp contrast to traditional IRAs, which largely are created through rollovers from employer-sponsored retirement plans.
The report, “The IRA Investor Profile: Roth IRA Investors’ Activity, 2007–2012,” released Monday, examines a slew of variables on Roth IRAs, including contributions, tax rule changes, withdrawals, investor age and equity holdings. The report is based on the IRA Investor Database, a joint project by ICI and the Securities Industry and Financial Markets Association, and it looks at two populations of Roth IRA investors: 2.5 million “consistent” Roth IRA investors, who had accounts in every year between 2007 and 2012; and a snapshot of 5.1 million Roth IRA investors at year-end 2012.
“The use of Roth IRAs has grown significantly since their introduction in the late 1990s, and they have become an important tool for Americans to save for retirement,” said Sarah Holden, ICI senior director of retirement and investor research, in a statement.
First available in 1998, Roth IRAs had accumulated more than $400 billion in assets by year-end 2012 and exceeded $500 billion at year-end 2013.
Roth IRAs mainly differ from traditional IRAs in their tax treatment. With a Roth IRA, taxes are paid up front on contributions and conversions, and withdrawals generally are tax-free in retirement. With traditional IRAs, contributions may be tax-deductible, and withdrawals are taxed.
Roth IRA Investors Consistently Contribute and Rarely Withdraw
The report found that contribution activity is much more important to Roth IRA investors, with 71% of new Roth IRAs opened only with contributions. In recent years, nearly $20 billion of contributions has flowed into Roth IRAs each year.
“In any given year, Roth IRA investors are more likely to make contributions than traditional IRA investors,” states the ICI report. “In tax year 2012, about three in 10 Roth IRA investors (aged 18 or older) made contributions, compared with fewer than one in 10 traditional IRA investors (aged 25 to 69).”
Traditional IRAs are largely created through rollovers, as the ICI report found nearly nine in 10 new traditional IRAs in 2012 were opened only with rollovers. In contrast, about one in 10 Roth IRAs were created through rollovers in recent years.
Not only are Roth IRA investors making contributions, but they are doing so at the legal limit and consistently year to year. According to the report, more than four in 10 investors who contributed did so at the legal limit, and more than two-thirds of investors who contributed at the limit in tax year 2011 did so again in tax year 2012. Withdrawals from Roth IRAs are much lower than from traditional IRAs, mostly because traditional IRA investors 70½ or older must take required minimum distributions, while a Roth IRA has no RMDs during the account holder’s lifetime unless it’s inherited.