7. Differing rules between Roths and traditionals put pressure on the latter.
Since traditional IRA investors have to start taking required minimum distributions at age 70½, and also have to stop making contributions, those constraints put “downward pressure on account balances among older traditional IRA investors,” according to the report. Roth investors don’t have to deal with that. In addition, the report says that increased Roth conversion activity in 2010 might have also “put downward pressure on average traditional IRA balances.”
6. Roth investors don’t withdraw as often as traditional IRA investors.
Just 4% of Roth investors age 25 or older made withdrawals in 2016, compared with 24% of traditional IRA investors. Of course, Roths also have no RMDs (unless they’re inherited), unlike traditional IRAs.
5. Roth investors don’t roll over anywhere near as often as traditional investors.
Not only are rollovers the “predominant way investors open traditional IRAs,” says the report, in 2016, about 1 in 10 of traditional IRAs — including 70% of new accounts — received rollovers. But for Roths, it’s a different story; “In any given year, fewer than 3% of Roth IRA investors made rollovers.”
4. Equities and equity funds make up larger allocations in Roth IRAs than in traditional IRAs.
At year-end 2016, 65% of Roth IRA assets were invested in equities and equity funds — mutual funds, exchange-traded funds (ETFs) and closed-end funds. But in traditional IRAs, they only made up 53% of assets. And while allocation to target date funds and balanced funds were pretty close — 19% in Roths, compared with 18% in traditionals — Roths had a smaller bond/bond fund allocation, at 7%, than traditional IRAs, which came in at 17%. In addition, Roths also had smaller money fund allocations, at 7%, than traditionals at 9%.
3. IRA investors with contributions are more likely to stick with contributing from year to year.
The report finds that more than 70% of traditional IRA investors who contributed in tax year 2015 also contributed in tax year 2016. But Roth investors were even more determined, with 80% who had contributions in tax year 2015 also contributed in tax year 2016.
2. New traditional IRAs are typically opened by rollovers, while Roth IRAs are more often started with contributions.
In 2016, more than 80% of new traditional IRAs were started up just with rollovers from other tax-deferred retirement savings vehicles. In addition, at year-end 2016, more than half of traditional IRA investors with an account balance had rollovers in their account. But such is not the case with Roths, which less commonly have rollovers; in addition, contribution activity is more prominent. In fact, 70% of new Roth IRAs opened in 2016 only through contributions.
1. Roth investors tend to be younger than traditional IRA investors.
Only 16% of traditional IRA investors were younger than 40 at year-end 2016, compared with 31% of Roth IRA investors. In addition, just 26% of Roth IRA investors were 60 or older, compared with 41% of traditional IRA investors. Says the report, “This younger age distribution reflects, in part, the rules governing access to Roth IRAs, which have long been subject to varying limitations on contributions, rollovers, and—until 2010—conversions.”
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Roth and traditional IRAs don’t behave the same way, and neither do their investors.
According to two reports released by the Investment Company Institute, there are a number of differences between the two sets of investors, although both account types “provide savers with flexibility and diversification in their retirement savings options,” Sarah Holden, ICI senior director of retirement and investor research, says in a statement.
Holden adds, “Both IRAs have options that appeal to workers in various stages of their lifetime savings cycles and help millions of Americans prepare for retirement.” Differences range from how such accounts are started to the demographics of each type’s devotees. And while both groups had only “modest” reactions to financial stresses, there are a number of ways in which the Roth group diverges from the traditional crowd.
Traditional IRAs held $6.9 trillion in assets as of the end of 2016, while Roths held $690 billion at the same time. Traditional IRA investors at the end of 2016 numbered close to 12 million, while Roth investors numbered 5.9 million. Numbers aside, there are other contrasts between the investor groups themselves.
Check out the gallery for seven differences between investors who own Roths and those who have traditional IRAs.
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