IRA market still growing
NEW YORK – It’s been 30 years since Americans opened their first Individual Retirement Accounts, and now the tax-deferred program designed to help workers save and preserve funds for the future has grown into a $3 trillion industry.
The IRA was the product of legislation enacted in 1974 to help fill a gap for workers who did not have access to employer-sponsored retirement plans, and to give people who change jobs a way to roll over their accumulated savings. Today, one of every four retirement dollars is held in an IRA, according to the Investment Company Institute, the trade group for the mutual fund industry. More than 45 million U.S. households – 40 percent – own IRAs, and that number is expected to rise as workers take greater responsibility for their retirements amid rising doubts about the future of Social Security.
“If you invest often and early in life, time works on your side, and you can really build up a substantial amount toward your retirement security,” said Brian Reid, chief economist with the ICI. “The fact that 40 percent are participating, that’s a great thing, but that means there are large numbers of individuals who are not taking advantage of the tax incentives.”
As an incentive to get people to set aside more money for retirement, the government allows individuals to contribute up to $4,000 to an IRA tax free, up from $3,000 last year. The rise in the maximum contribution, which had been capped at $2,000 from 1981 until 2003, and a program that allows workers over the age of 50 to make “catch-up” contributions were long-awaited. But experts say workers should not see these numbers as limits on what they should invest. They are merely a “tax incentive to get started,” Reid said.
Be aware: You can get a tax deduction for what’s known as a traditional IRA only if you are not covered by an employer’s pension plan. For the accounts known as Roth IRAs, contributions are not deductible.
With workers living out far longer retirements than they did a generation ago, figuring out how much you’ll need to maintain the lifestyle you want is critical, said Marilyn R. Bergen, a financial planner in Portland, Ore., who specializes in retirement and estate planning.
“I think there are people who think if they simply maximize their 401(k) and do something with their IRA, that’s a lot of money,” Bergen said. “But if they are going to live 30 years in retirement, and they don’t have a company pension, and are strictly relying on their investments and Social Security, and they’re expecting to maintain to keep their same lifestyle, it’s probably not enough.”
The assets held in IRAs have changed significantly over the years, as well. The ICI’s research found that in 2003, mutual funds made up about 43 percent of IRA assets, and individual securities held in brokerage accounts made up 37 percent. In contrast, some 72 percent of IRA funds were held in bank and thrift deposits in 1981.
When selecting investments to hold in an IRA, your time horizon is the most critical factor, said Bergen and other experts. If you don’t plan to retire for 10 years or more, your portfolio can be more aggressive – more stock-oriented. But if your time frame is shorter, holding a higher percentage in bonds will help offset the stock market’s volatility.