Home Finance Why Isn’t Anyone Using Their IRA Correctly?

Why Isn’t Anyone Using Their IRA Correctly?


When you think about how to save for retirement, the first thing that probably comes to mind is contributing to a company 401(k). But not all employers offer one, which is where the Individual Retirement Account (IRA) comes in.

IRAs help those who don’t have access to work 401(k) plans to still save in a tax-advantaged way. Unfortunately, people who own IRAs aren’t contributing to them actively enough, according to new research out of the Center for Retirement Research at Boston College.

The study found that the total amount of assets held in IRAs nationwide is a whopping $7.8 trillion — far surpassing the amount currently held in other types of retirement accounts, like 401(k)s and pension plans. And yet, only 13% of the new money flowing into IRAs comes from people making contributions — while only 14% of U.S. households overall say they contribute actively to an IRA.

So what gives? Turns out a lot of the assets held in IRAs are a result of 401(k) rollovers, according to the researchers. Then once that money is rolled over, most account holders aren’t continuing to save more money into those IRAs, treating them instead like a “holding pen” for their IRA assets (and potentially missing out on the compound growth that could come from additional contributions).

Even more surprising: the largest chunk of people who are actively contributing to their IRAs are higher- or moderate-income earners who are already contributing to a 401(k). While the idea of saving in more than one retirement account is one we applaud, the stats also imply that the people who could stand to benefit the most from an IRA (those who don’t have access to workplace retirement plans) don’t seem to be taking advantage of it.

Does this suddenly make you feel guilty about not having added to your IRA in a few months — or years? It’s never too late to get back on track. Here are a few small steps you can take to start saving again.