Congress Did Not Create IRAs for You to Use Them Like This

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When Congress established individual retirement accounts more than 40 years ago, the goal was to provide a new retirement saving option for the millions of workers who didn’t have access to an employer-sponsored retirement plan.

These retirement accounts are supposed to offer tax benefits for people who are either self-employed or working for companies — mostly small businesses — without employer-sponsored retirement programs.

However, a new study from the Center for Retirement Research at Boston College shows that 53% of people contributing to an IRA also have a 401(k). Around 87% of the money held in IRAs, which accounts for more than $400 billion, came from 401(k) rollovers in 2014. Only about $60 billion was from normal IRA contributions.

Rolling over a 401(k) into an IRA can be a smart move when you change jobs, and it’s definitely smart to have both a 401(k) and an IRA.

Still, these numbers show that the majority of people who use IRAs today are not the people the plans were designed to serve.

Why are People With 401(k) Plans Drawn to IRAs?

It’s not surprising that so many people with 401(k) accounts would find IRAs attractive, according to the study.

Most people open an IRA to roll over their savings from a former employer’s 401(k).

“The reason is that workers do not want to leave their money with their old employer, but moving money to their new employer’s 401(k) is difficult and time-consuming,” the study said. “As a result, most workers find it much easier to roll over to an IRA instead. They also like the idea of consolidating a number of retirement accounts in a single location.”

Who Uses IRAs?

The study breaks up most people who use and actively contribute to IRAs into three categories:

1. High-earning couples who also contribute to a 401(k).

2. Middle-income singles or one-earner couples who also contribute to a 401(k).

3. High-earning people who are self-employed.

The third group is the only one that falls within the category of workers the government created IRAs for. Those who earn less still need to put away money for retirement, but they aren’t among the people most likely to actively use an IRA.

The Boston College researchers who conducted the study support an automatic IRA enrollment plan for people who work for companies that don’t offer a 401(k).

“It is time to turn IRAs back into an active savings vehicle by auto-enrolling those without an employer plan into these accounts, with the ability to opt out,” the study said. “Ideally, such an auto-IRA policy would be a federal government initiative.”

An Obama-era mandate made it easier for several states to pass laws to create retirement savings plans, but in a recent vote, Congress repealed the law.

Your Turn: Do you own an IRA? If so, do you fit into the demographic of people they were designed to help?

Desiree Stennett (@desi_stennett) is a staff writer at The Penny Hoarder. She has a 401(k) but not an IRA.

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