The share of households contributing to individual retirement accounts has ticked up in recent years — a little bit for low-income workers and a lot for those younger than 40.
The surge in younger contributors is most likely due to new fintech platforms that promote IRAs to millennials, according to a new analysis by the Center for Retirement Research. These contributors also tend to have a 401(k), so IRAs supplement those already with a retirement saving strategy.
Lower-income workers, the analysis suggests, seem to be embracing IRAs due to state-based auto-IRA initiatives, which have broadened access to workplace-based plans. It remains to be seen, however, if the lesser contribution rates among lower-income workers will lead to greater retirement security.
“If IRA contributions have increased and that increase is driven by auto-IRA programs, it would mean that IRAs are now fulfilling their original intent of providing retirement savings for the uncovered,” the authors note. “If the increase is driven by fintech platforms, popular among the young, higher-income, and tech-savvy, it would mean that IRAs are still mainly a vehicle for those who already have savings to gain more tax advantages.”
With such questions in mind, they conclude, this is a good time to reassess IRA contributions.
Where IRAs Stand
Citing data from the Investment Company Institute, the analysis shows that about 55.5 million households — or 42% of total U.S. households — owned one or more types of IRA in 2023.
Households with traditional IRAs continue to outnumber those with Roths, with 31.9 million owning Roth accounts and 41.1 million owning traditional IRAs. Some 5 million are investing in IRAs through workplace paycheck deferral arrangements. Accordingly, assets in IRAs account for over half of all assets in private sector retirement accounts, exceeding those in either pensions or defined contribution plans.
As covered in prior research, the lion’s share of new money flowing into IRAs each year is rolled over from employer-sponsored retirement plans rather than coming from individual contributions. Indeed, just 15% of total households contributed to their IRA account in the year studied.
Workers do not want to leave their money with former employers, according to the analysis. Because trying to move money to a new employer’s 401(k) can be difficult and time-consuming, most workers roll over to an IRA to preserve the tax-favored treatment of their savings.
“Workers also like the idea of consolidating a number of retirement accounts in a single location or gaining access to more investment options,” the authors note.
Fintech’s Influence vs. State Mandates
From here, the researchers seek to identify why IRA inflows have accelerated in recent years, both in terms of contributions and rollovers. They start by considering the effects of state-based auto-IRA programs.
Generally, these programs mandate that employers that do not offer retirement plans must enroll their workers in an IRA. As of the publication of the analysis, 11 states had launched such mandatory programs. Between 2019 and 2024, the number of funded accounts in these state auto-IRA programs grew from 50,000 to 965,000.
“[State-mandated] IRAs are fulfilling their original purpose for participants, allowing workers without a workplace plan to save rather than serving merely as a rollover vehicle,” the authors contend. “Many of the participants are low- and moderate-income workers, so auto-IRA programs had only reached $1.8 billion in assets by the end of 2024.”
Likewise, the authors consider the influence of fintech platform-based IRAs, particularly among younger investors. Originally, the authors note, these platforms focused on brokerage accounts, drawing in investors by cutting down the costs and complexities of investing. Since 2020, though, many have begun to offer enticing bonuses for transferring or contributing assets to an IRA.
“Robinhood, for example, announced it would be offering IRAs in December 2022,” the authors report. “By December of 2024, just two years later, it had about 1.2 million accounts with over $13.1 billion in assets.”
While much of the money in the accounts is likely rollovers, some of it represents new contributions.
“The question is whether the state auto-IRA and fintech initiatives have altered the composition of contributors,” the authors observe.
What the Data Shows
To answer this question, the analysis considers the Federal Reserve’s Survey of Consumer Finances, particularly the demographic and socioeconomic characteristics of IRA-contributing households for 2016, 2019 and 2022.
“At first,” the authors observe, “the pattern looks much the same across the years. Contributors to IRAs tend to be a fairly privileged group. About two-thirds of these households are in the top third of the income distribution, and they are mostly white, married and college educated.”
Two changes, however, stand out for the period during which both fintech platforms and state-based IRAs have come into vogue. First, the share of contributors in the bottom third of the income distribution rose from 5% to 9%. Second, the share of contributors younger than 40 increased from 28% to 41%.
One piece of evidence that auto-IRAs and fintech have facilitated the growth of IRA contributions is that “Roth only” contributors now account for a majority of total contributors. Lower-earning uncovered workers and young workers tend to benefit more from Roth accounts, the authors explain.
The impact of the new auto-IRA programs must by definition be modest, the authors conclude, since the number of contributors is only about 1 million — compared to 20 million IRA-contributing households in 2022.
“Yet, these programs could well explain the increase between 2019 and 2022 in the share of contributions coming from the bottom third of the income distribution — households in 2022 with incomes under $52,000,” the authors say. “These are likely new savers who are gaining access to tax-advantaged options through Roth IRAs.”
Similarly, fintech can explain the shift in the age distribution of contributors. Generally, only younger investors turn to their phones to save for retirement.
“But who are these new young IRA contributors?” the authors ask. “The increase in the percentage of under-40 households contributing is concentrated among the top income tercile — the third of households with the highest incomes. The middle tercile also shows a modest increase — albeit from really low levels.”
The Bottom Line
The spread of state auto-IRA programs and the growth of fintech platforms, the analysis finds, have both likely helped to increase contributions, change the composition of contributors and “perhaps improved the share of workers with access to tax-advantaged saving.”
“Indeed, the percentage of households contributing to IRAs did increase between 2019 and 2022,” they note. “The main action, however, seems to have been spurred by fintech, which appears to have sharply increased contributions among younger households in the top third of the income distribution.”
Since most of these households already have a 401(k)-type plan, IRAs represent a mechanism for those with retirement assets to gain more tax-advantaged saving rather than a strategy for increasing the share of workers with access to work-based savings plans.
Credit: Adobe Stock
© Arc, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.