Who Contributes to Individual Retirement Accounts?

Individual Retirement Accounts (IRAs) now hold nearly half of total private retirement assets. Although almost all of the growth in IRA assets is driven by rollovers from employer-sponsored retirement plans, individuals’ contributions represent 13 percent of the new money flowing into IRAs each year. This brief uses data from the Survey of Income and Program Participation to examine the characteristics of those who contribute to an IRA. The discussion proceeds as follows. The first section provides a brief history of IRAs and discusses the difference between traditional and Roth IRAs. The second section describes the enormous importance of IRAs among private sector retirement plans and the relative unimportance of contributions to the buildup of assets in IRAs. The third section, using latent class analysis, shows that IRA contributors fall into three distinct groups: 1) higher-income individuals in two-earner couples who often currently contribute to a 401(k); 2) individuals in middle-income, one-earner households who also tend to contribute to a 401(k); and 3) higher earners who are self-employed. The final section concludes that only a tiny fraction of all households use IRAs to gain access to tax-preferred retirement saving – the original intent behind the introduction of IRAs. Automatically enrolling those without an employer plan into IRAs would be an effective use of a retirement savings vehicle that today serves primarily as a passive receptacle for rollovers.