Individual Retirement Accounts (IRA) make up a quarter of all retirement assets. What do we know about these accounts and the behaviors of IRA account holders? Where can advisors offer important guidance to account owners? Fortunately, new studies can help answer these questions!
What trends do we see in IRAs?
The Employee Benefit Research Institute (EBRI) conducts research on a variety of retirement-related topics and maintains a database of IRA information. Last January, EBRI released a brief on IRA account trends over a five-year period from 2010-2014. In the brief, EBRI examines the behavior of over 21 million account owners focusing on those who had an IRA account continuously over the five years. So what did they find out?
Account balances for traditional IRAs grew an average of 45.8% for continuous account holders with the top 25% growing by more than 78%. The growth was even larger for Roth IRA where the top 25% of account holder balances grew by 100%. The average account balance in 2014 was $134,244.
The differences observed between Roth and traditional IRAs also extend to the area of contributions. For traditional IRAs, 97.6% of account holders did not make any contributions versus 2.1% who made contributions in all five years. In contrast, for Roth IRAs, 61.5% made no contributions while 10.4% contributed in all five years.
Among all those who contributed, young account holders (age 25-29) were the most apt to make contributions with 61.3% contributing in at least one year and 16% contributing in all five years. The fact that so many young people are saving toward retirement is great news. What is not clear is whether they are also contributing to an employer-sponsored retirement plan or if their IRA is their sole retirement savings vehicle. Certainly, if they are also participating in an employer-sponsored plan then there may be much cause for hope for the younger generations in terms of retirement readiness.
Are account holders maxing out their contributions? Many are not although the picture shows improvement. In 2010, 43.5% of account holders made the maximum contribution which grew to 55.4% by 2014. The average contribution in 2014 was $4,119.
Data on withdrawals in the briefing is interesting though not surprising. The percent of account holders making withdrawals has risen steadily over the five-year period. In 2010, 12.9% of account holders had made withdrawals which rose to 19.6% by 2014. This is hardly surprising as more account holders hit 70 ½ and begin taking out RMDs. This is a trend that will likely continue as more of the Boomer generations hits this milestone.
One interesting discovery of the research was the marked increase in equities as a proportion of accounts starting in 2012. The average proportion of equities jumped 7.7%, increasing from 44.4% in 2011 to 52.1% in 2012. One might speculate that this trend would continue, at least to the present, as many account holders aim to take advantage of the bull market.
How can advisors provide guidance to IRA account holders?
While this information is interesting, what role do advisors have in assisting IRA account holders? Ongoing contributions are fairly straightforward but there are trickier areas where advice from a financial advisor can go a long way to helping consumers.
One area of needed advice is in regard to IRA rollovers. When a person leaves their job, they will make a decision about what to do with their employer’s retirement plan. Many, through inaction, effectively decide to leave their savings in the plan. However, others will consider rolling the account over into an IRA or a new employer-sponsored plan. Annually, retirement plan participants roll over more than $400 billion to IRAs or new retirement plans. Helping make these key rollover decisions is a great opportunity for advisors to come alongside consumers to help them make informed decisions about their retirement plan. A new study from the LIMRA Secure Retirement Institute found that most of those surveyed sought rollover guidance when leaving an employer. Of those seeking guidance, about half relied on a financial advisor to help make their decision. Clearly, this is an area where advisors can provide needed guidance.
A second area where advisors can help guide consumers is in the area of Roth conversions. Consumers who are at least moderately informed may at some point consider whether it would make sense to convert their traditional IRA to a Roth or to rollover a retirement plan balance into a Roth IRA. While many might be aware of this option, few consumers will be capable to evaluating the immediate and long-term implications of this decision. How much would they pay in taxes now versus in retirement? What would the projected difference in future account balances be in retirement? These are questions that a financial advisor can help answer and provide important guidance as to the pros and cons of a Roth conversion and whether it would be beneficial for a given person.
TRAK has a Roth conversion calculator which includes an amazing storyboard illustration to help clients really understand how the conversion works and lets them easily compare the two scenarios. Of course, the results of either of these tools can be easily incorporated into a full retirement plan using TRAK’s Gap calculators. We are pleased to offer these unique tools to help advisors provide valuable education to clients about making the most of their IRA.