IRAs Are Not a Primary Retirement Savings Vehicle

Newly released results of a study from Fidelity Investments indicate Individual Retirement Accounts (IRAs) are not generally being used as a primary retirement savings vehicle and many investors lack understanding about IRAs.
According to a press release from Fidelity, the study results showed less than half (46%) of investors surveyed are utilizing an IRA as part of their overall retirement savings strategy. In addition, only 7% of non-IRA holders surveyed said they plan to open an IRA before the April 16 tax deadline.

Even current IRA holders surveyed were not fully utilizing their existing accounts, with just 37% having contributed for the 2006 tax year as of December 1, the release said. Only 16% of respondents said they are extremely/very likely to make a contribution before the April tax filing deadline.

Fidelity suggested lack of knowledge and lack of understanding about IRAs are barriers to IRA ownership. Of the 500 IRA owners and 500 non-IRA owners it surveyed, almost half (46%) of non-IRA owners said they believed that opening an IRA account requires the maximum annual dollar amount contribution. Additionally, 59% did not know they could contribute to an IRA opened to accept a rollover distribution from another source, allowing consolidation of retirement savings in one place.

The study also indicated investor confusion about contributing to both a 401(k) and an IRA, with only 52% of non-IRA owners surveyed saying they knew they could contribute to both in the same year. Also, 56% of respondents overall and three quarters (74%) of non-IRA owners did not know the correct 2006 contribution limits.

Future Savings Habits

Only 26% of IRA owners and 31% of non-owners said they are likely/very likely to make a lifestyle change, such as cutting back on restaurant meals or takeout, in order to save more for retirement next year.

Although 49% of non-owners indicated a lack of money is one of the major barriers in saving more for retirement, when presented with a hypothetical windfall of $5,000, IRA owners said they would invest an average of $2,200 for the long term, while non-owners said they would invest just $1,250 on average. Additionally, of those who would use the money for long-term savings, 49% of non-IRA owners and 45% of owners said they would elect to put the money into a bank account such as a CD or savings account instead of an IRA or other tax-advantaged retirement savings vehicle.

For the Fidelity study, interviews were conducted online from November 21-30, 2006, by Northstar Research Partners among 1,000 Americans who are the primary or joint decision-maker for investments; have household income of $40k or more; and are age 25 to 64 and not retired.