Personal savings has become an increasingly important part of preparing for financial security in retirement. That Americans recognize this is seen in the findings of a study from the Investment Company Institute that found, despite the challenges wrought by today’s tough economy, individual retirement account (IRA) ownership has remained steady.
According to the ICI report, The Role of IRAs in U.S. Households’ Saving for Retirement, 39% of households own IRAs. This includes 31% of households reporting owning traditional IRAs, 15% owning Roth IRAs, and 8% owning employer-sponsored IRAs such as SIMPLE IRAs, SEP IRAs and SAR-SEP IRAs. IRA holdings represent about one-quarter of U.S. total retirement assets, and about 9% of all household financial assets.
IRA growth has been fueled by rollovers from employer-sponsored retirement plans. In 2009, 54% of households owning traditional IRAs had rollover assets in these IRAs, and among IRA owners, 89% reported that they had rolled over their most recent retirement plan distribution in its entirety into their IRA. For related account options and planning considerations, see IRAs and Multi-Generational IRAs.
In contrast, relatively few IRA-eligible individuals actually make contributions of new money to IRAs. In 2008, only 15% of U.S. households contributed to either a traditional IRA or a Roth IRA, which underscores how important rollovers have been to IRA growth.
Despite uncertainties in the financial markets and economic pressures that have left many households cash-strapped, IRA withdrawals continue to be infrequent and mostly retirement-related. Only 19% of households owning traditional IRAs took a withdrawal in tax year 2008, and for 84% of these households the withdrawals were made in retirement.
Even among IRA-holding households in which at least one family member was of retirement age, nearly 60% did not take an IRA withdrawal in 2008. Only 5% of traditional IRA holders making withdrawals were younger than age 59½, and 64% of IRA-owning households not making withdrawals said it was unlikely they would withdraw before age 70½.
Among IRA holders who did make withdrawals, the size of these withdrawals was typically modest, with a median of 8% of the IRA account balance withdrawn. Expressed in dollar amounts, one-third of the withdrawals were less than $2,500.
For households withdrawing IRA funds in retirement, 44% reported using withdrawal proceeds for living expenses while almost a third said they reinvested the withdrawal or deposited it in another account. Health care expenses (19%), home purchase, repair or remodeling (15%), and emergencies (14%) were other reported uses of IRA withdrawals.
The ICI report validates the continued importance of IRAs to U.S. household wealth and to individuals’ income in retirement. For those considering other retirement income options, see Income Annuities, and for bank-related retirement product information see IRA/KEOGH & Community Bank Insurance.
Frequently Asked Questions
What is the main reason IRAs have grown?
Rollovers from employer-sponsored retirement plans have been the main source of IRA growth, more so than new contributions.
How common are IRA withdrawals before retirement?
Withdrawals before retirement are uncommon; most withdrawals reported were taken in retirement and relatively few were by those under age 59½.
How large are typical IRA withdrawals?
Withdrawals tend to be modest: the median withdrawal was about 8% of the account balance, and many withdrawals were under $2,500.
What do people use IRA withdrawals for in retirement?
Common uses include living expenses, reinvestment or deposit into other accounts, health care costs, home repairs or purchases, and emergencies.
Should I consider contributing new money to an IRA?
Increasing regular contributions can improve retirement security, since much IRA growth has come from rollovers rather than new savings.