The amount of money Americans have socked away in their individual retirement accounts (IRAs) is rising. And that’s a step — though perhaps small in the scheme of things — in the right direction.
On average, Americans who owned at least one IRA had $119,804 in their accounts in 2013, an increase of 30.4% from 2010, according to a new report from the Employee Benefit Research Institute (EBRI), a Washington, D.C. research firm.
What’s more, the median followed the same pattern; the average account balance rose 27.2% to $32,179 in 2013, from $25,296 in 2010. And the average contribution increased from $3,335 in 2010 to $4,145 in 2013.
The news gets even better for older Americans. Folks ages 60-64 watched their IRA account balances rise on average to $165,139 in 2013 from $123,209 in 2010, an increase of 34%; folks 65-69 IRA witnessed account balances rise to $212,812 in 2013 from $156,581 in 2010, an increase of 36%; and folks 70 and older had account balances rise to $219,790 in 2013 from $175,934 in 2010, an increase of 25%.
Few Americans contribute to IRAs
First, relatively few people are contributing to their IRAs. In fact, the percentage of individuals who contributed to their IRA ranged from 12.1% in 2010 to 13.8% in 2013. And among traditional IRA owners, just 6% contributed to an IRA annually.
And that means much of the growth in IRAs account balances comes as a result of 401(k) rollovers and market gains. “Rollovers are the main source of additional funds to traditional IRAs other than market returns,” said Craig Copeland, senior research associate at EBRI. About 6% of additional assets to IRAs were from contributions, 35% from rollovers, and 59% from market gains, he said.
Given that, some experts suggest taking a balance view of the growth in IRA account balances. “This (the increase in IRA account balances) may not really represent a huge increase in retirement readiness, but mostly moving funds from one pocket to the other,” said Gary Cotter, a certified financial planner with Cotter Financial in Sun City Center, Fla. “On the other hand we’ve seen pretty robust equity markets during the period studied, so that hasn’t hurt either.”
The most important thing about research? Timing.
Second, experts said the period studied in the EBRI report, 2010 to 2013, doesn’t tell the whole story. It doesn’t show how little account balances have moved if the starting point is 2008 instead of 2010. For instance, according to the Federal Reserve Board’s Survey of Consumer Finances, the median value of all retirement accounts for those families holding retirement accounts decreased 16% between 2007 and 2010 and increased 25% between 2010 and 2013. So, selecting 2010 as the base makes the change look much more positive because of the effect of the Great Recession on the values in 2010, say experts.
Experts also said using averages is misleading because it is affected by very large holdings of a small segment of the account holders. The focus, they say, should be on the median value which is the value in the middle of the value of all accounts. Some think of the median as the typical value. The median value is reported by EBRI to increase 27% between 2010 and 2013 which is very similar to the 25% value in the Survey of Consumer Finance.
Of note, the average IRA account balance rose to $95,363 in 2013 from $54,863 in 2008, but the median IRA account balance rose to $25,438 in 2013 from $15,756 in 2008, according to EBRI. Read also the Report on the Economic Well-Being of U.S. Households in 2014 and Most Households Approaching Retirement Have Low Savings.
So is there a silver lining in the EBRI report?
Roth IRAs on the rise
One bright spot is that Americans are contributing to Roth IRAs. “More contribution dollars are going in Roth IRAs than traditional IRAs,” said Copeland. “Furthermore, the asset level in Roth IRAs is lower, so this higher contribution amounts is driving the increase in the Roth asset amounts.”
Consider: The median Roth IRA increase was 51.6% from 2010 to 2013, compared with 28.3% for all traditional IRAs. “A major factor in these different rates of growth was that new contributions make up a larger portion of the Roth IRAs than they do for traditional IRAs, which magnified the impact of contributions,” according to the EBRI report. Roth IRAs had, on average, account balances of $37,010 and a median balance of $15,018.
“I am glad to see that interest in Roth IRAs appears on the upswing as measured by contributions,” said Cotter. “It seems certain that we will face higher taxes in the future than what we have at present. The ability to access Roth accounts tax free will become more valuable as tax rates increase.”
Of note, Roth IRAs — which are funded with after-tax contributions that then grow tax-free — are not subject to required minimum distributions for those older than 70½ years, as are traditional IRAs. Plus, distributions are tax-free.
Dollars in IRA system growing
“Overall, the dollars in the IRA system are growing, so those with an account will have more assets to fund retirement,” said Copeland. “Younger people are using Roth IRAs to build up assets for retirement, while traditional IRAs are becoming a holding place for assets until and through retirement usually built up from employment-based plans.”
Of note, IRAs now represent 27% of the $26.2 trillion in retirement plans in the U.S. while 401(k) and similar plans represent 19%.
Curt Weil, a certified financial planner in Palo Alto, Calif. said the steady drumbeat of articles stressing an individual’s personal responsibility for their own retirement is starting to pay off. “The public seems to have heard and acted,” he said. “In short, vibrant market plus annual contributions equals strong growth toward future security.”
Contribution limits matter
The average contribution amount jumped in 2013 because of the increase in the contribution limit, said Copeland. “The contribution limit for IRAs does seem to constraint many IRA owners, as the percentage contributing the maximum was 81% as high after the increased limit than before it,” he said.
Of note, the percentage of contributors who contributed the maximum rose from 43.5% in 2010 to 53.5% in 2012. However, with the increase in the maximum allowable contribution in 2013, the percentage contributing the maximum overall fell to 43.3% in 2013. In 2013, the maximum one could contribute to a traditional IRA was $5,500 for those under age 50 and $6,500 for those age 50 and older.
Don’t confuse brains with a bull market
“The positive results in the stock market has pushed asset levels up, so the assets IRAs are invested in will have an impact on the amount ultimately accumulated,” said Copeland. “But a negative market can have the same impact.”
Therefore, Copeland said, “individuals need to check on their investments to make sure they are in the place they need to be to generate the income from them that will keep them financially satisfied.”