There was a time in American history when citizens were on their own when it came to organizing and investing their retirement funds. Today, many Americans have the opportunity to place a portion of their income into a defined contribution account or into an Individual Retirement Account with an eye toward having funds available in retirement.
DC plans and IRAs have gone through numerous adjustments, and currently suffer a bit from low contribution rates, a slow recovery from the 2008 financial crisis, and the fluctuating stock market performance. However, Americans still make the pre-tax contributions, because any retirement account is better than none.
Our fourth-quarter wealth segmentation series study Asset Allocations, Portfolios and Primary Providers analyzes how the assets of affluent investors are distributed, and includes specific information on IRA ownership.
For the purposes of comparison, Ultra High Net Worth investors report 67 percent of their assets as investable assets, and 24 percent of those assets are in rollover, contributory or Roth IRAs, with an additional 6 percent in defined contribution plans. Millionaires have 55 percent of their assets as investable, with 24 percent in IRAs and 11 percent in DC plans, and Mass Affluent have 38 percent of their assets as investable, but they have a much higher percentage of IRA ownership at 33 percent, with 13 percent in employer-sponsored DC plans.
There are factors that affect those percentages. Mass Affluent investors are on average younger and more likely to still be working, so they are more likely to have defined contribution accounts through their place of employment.
Age plays a huge role in the ownership of DC plans and IRAs. Among Mass Affluent investors in our study, 88 percent of those under the age of 36 own employer-sponsored defined contribution plans.
Forty-two percent of Mass Affluent investors own Roth IRAS, which are after-tax plans that have no tax penalties for withdrawals. Roth IRAs do have an income maximum, so they again are more likely to be used by the less wealthy investors in the study.
For the 2015 tax year, the income maximum to contribute to a Roth IRA for a single person was $116,000. For a married couple the maximum income was $183,000
Conversely, only 41 percent of Millionaires over the age of 65 still have employer-sponsored DC plans, and only 48 percent are invested in Roths. The oldest investors are more invested in rollover IRAs (63 percent) than the youngest investors (50 percent).
There are also disparities among Millionaires and their savings plans based on occupation. Among employer-sponsored DC plan participation is high among professionals (67 percent among doctors and lawyers) while 71 percent of Senior Corporate Executives have rollover IRAs (which they may have invested in to move funds from an earlier DC plan from early in their careers).
With the aging of America, the role of contributory, rollover and Roth IRAs is expected to change. As Baby Boomers stop working, they are likely to move assets from their employer-sponsored accounts.
“Initially, defined contribution plans and rollover IRAs are straightforward transactions,’’ said Spectrem president George H. Walper. “But investors can save large sums of money by making the correct decision about what to do with those IRA funds after they are done working, because distributions are taxed differently based on what kind of IRA they come from. This is where a financial advisor can assist greatly in the decision-making process.”
There is a tax burden when converting funds initially to Roth IRAs, but there is no limitation to the amount that can be converted, although there is the aforementioned maximum income level for participation. There are limitations to the amount that can be contributed to an existing Roth account.
Meanwhile, as Baby Boomers move into the 70-plus age group, they are required by law to take distributions from their defined contribution, rollover or contributory IRAs, at which point those distributions are taxed.