This finding is highlighted in a
When asked how familiar they were with IRAs, 70% described themselves as familiar or very familiar. Moreover, 79% said they have personally contributed to an IRA. Generally, investors seem to understand that IRAs may come with tax advantages such as tax-deferred earnings, tax deductibility, or tax-free withdrawals. But some investors do not appear to fully understand which benefits are associated with Traditional IRAs and which are associated with Roth IRAs.
For example, almost half (48%) of investors in the study correctly cited tax-deferred growth potential and the ability to reduce taxable income with tax-deductible contributions as features of Traditional IRAs. But about one-fifth (21%) incorrectly cited the ability to withdraw savings without paying taxes after age 59 1/2 if the account has been open for at least five years as a benefit of Traditional IRAs when it is actually a benefit of Roth IRAs.
Similarly, about half (51%) of these investors correctly cited tax-free growth potential as a benefit of Roth IRAs and almost one-third (31%) knew that Roth IRAs provide for tax-free withdrawals after age 59 1/2 if an account has been open for at least five years. But about one-fifth (21%) incorrectly believed that Roth IRAs allowed for tax-deductible contributions.
"It's encouraging that a majority of younger investors are familiar with IRAs, generally understand that the accounts offer tax advantages, and have used IRAs to save for retirement," said
IRAs were introduced in 1974, when the Employee Retirement Income Security Act became law. At first, tax-deductible contributions of up to
With the passage of the Economic Recovery Tax Act in 1981, the tax-deductible contribution limit was increased to
The Tax Reform Act of 1986 reduced or eliminated the tax deduction for higher-earning workers who were covered under a workplace plan, though non-deductible contributions were still permitted. The Taxpayer Relief Act of 1997 created Roth IRAs but income limits were imposed, leaving many investors ineligible to contribute to them.
Over the years, the maximum contribution limit to IRAs was increased to its current level of
"The history of IRAs is complex enough to make most anyone's head spin," said Ms. Fahlund. "As eligibility rules and contribution limits continued to change over the years, it appears that it became more difficult for many investors to understand the distinctions among different types of IRA accounts and to choose the most appropriate one for their circumstances."
Roth IRAs have been a big positive for investors and one of the most important developments in retirement savings in many years, Ms. Fahlund said. "Roth IRAs have opened up an excellent after-tax savings opportunity, particularly for investors under age 50. Our job at financial institutions is to make sure that investors who are eligible to contribute to Roth IRAs don't miss out on their special long-term advantages."
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About the Survey
The survey was conducted online within
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