ICI: IRA Use Continues to Spread

ROTH IRAs showed the greatest increase in ownerships, up 21% – to an aggregate of 16 million American households – from 2002’s figures.    This compares to increases of 2% for traditional IRAs and a slight decrease of 4%   for employer-sponsored IRAs, according to research conducted by the Investment Company Institute (ICI).

“More Americans investing for their retirement continue to use IRAs as a significant way to achieve their long-term financial goals,” said Institute Executive Vice President Julie Domenick in a statement.

Households owning these vehicles were generalized by ICI as headed by middle-aged individuals (49 years old) with moderate household income ($62,500 annually) who are more likely to hold mutual funds, especially long-term mutual funds, in their IRA portfolios than any other type of investment.  

Most widely held were traditional IRAs, possessed by 75% of IRA-owning households, followed by ROTH IRAs (43%) and employer-sponsored IRAs (26%).   Overall, the typical IRA household has $160,000 in household financial assets with $20,000 of that sunk into various types of IRAs.

Further, the vast majority (75%) were found to be employed, either full time or part time, holders of four-year college or postgraduate degrees (64%) and married (63%).    Only 23% were found to be retired and the same number reported being self-employed.  

Examining where financial assets are held, far and away mutual funds were the most widely held (76%), followed by individual stocks (53%), certificates of deposit (51%) and whole life insurance with cash value (49%).    Additionally more than seven out of 10 (71%) held a defined contribution plan – 56% 401(k) plan – and 46% held defined benefit plans.  

Fund Factor

Even though the use of IRAs spread, assets within IRAs dipped slightly, down 8% to $2.3 trillion at year-end 2002, representing 23% of the $10.2 trillion US retirement market.   Primarily, these assets were concentrated in mutual funds, where more than half of total IRA assets are invested.   Net new cash flow from IRAs to mutual funds was an estimated $50 billion in 2002.

Nearly two-thirds (64%) of IRA households included mutual funds in their IRA portfolios, typically equity mutual funds (54%), but also with allocations in money market funds (28%), bond funds (26%) and hybrid funds (18%).   Additionally, 38% of IRA households held individual stocks in their IRAs while 27% annuities, 25% bank savings accounts, 12% individual bonds and 5% had other investments in their IRAs.

Adding, Subtracting

Twenty-seven percent of households owning a traditional IRA made contributions in tax-year 2002.   The median contribution stood at $3,000.

On the other side were those households withdrawing from IRAs in 2002.   Not surprisingly the general-withdrawal household was older (73 years old), with lower household income ($45,300 annually).   During the year, more than 58% made one withdrawal, 22% made three or more and 20% made two.   Taking all of their assets out of an IRA were 6% of the withdrawal households.

Overwhelmingly, the major reason given for the withdrawal was the age 70 ½ required minimum distribution (42%), followed by to purchase investments outside of an IRA (15%), other reasons (14%), to make a large purchase, to pay bills (11%) and to buy an home (11%).

A complete copy of the report can be found at  http://www.ici.org/pdf/fm-v12n3.pdf .