Roth IRA Investors Differ from Traditional IRA Investors

While 33.7% of U.S. households, or 41.5 million households, owned one or more type of individual retirement account (IRA) with $7.4 trillion in assets in 2013, Roth IRAs held only $550 billion, or a mere 7% of all IRA assets.

Roth IRA investors are quite different than traditional IRA investors, according to a new report from the Investment Company Institute (ICI), “The IRA Investor Profile: Roth IRA Investors’ Activity, 2007-2013.”

At year-end 2013, 31% of Roth IRA investors were younger than 40, compared to 15% of traditional IRA investors, and only 24% of Roth IRA investors were 60 or older, versus 38% of traditional IRA investors. “This younger age distribution reflects the rules governing access to Roth IRAs, including income limits on contributions and, until 2010, on conversions, as well as the historically limited scope for rollover activity,” ICI says. While 75% of Roth IRA accounts are opened with contributions only, 86% of traditional IRAs are opened with rollovers.

Looking at Roth IRA investors’ contribution, conversion and rollover activity in 2013, ICI found that only 8.6% of accounts were opened with a conversion and 11.9% with a rollover.

In 2013, the Roth IRA contribution limit was $5,500 for individuals younger than 50 and $6,500 for individuals 50 and over. Thirty-seven percent of Roth IRA investors contributed the maximum amount in tax year 2013.

As well, ICI found an 81% persistence in Roth IRA contributions between 2012 and 2013, meaning that more than eight in 10 Roth IRA investors who contributed in tax year 2012 also contributed in tax year 2013.

Roth IRA assets are also allocated more to equities, with 65% of these account assets allocated to equities or equity funds at year-end 2013, compared to 54% of the assets in traditional IRAs. “Some of the differences in allocations reflect the different age distributions,” ICI said.

Roth IRA investors rarely take withdrawals, as they are not required to take required minimum distributions at age 70-1/2, while traditional IRA investors are.  In 2013, only 3.4% of Roth IRA investors between the ages of 25 and 59 withdrew money from the accounts, compared to 9.1% of traditional IRA investors. For those between the ages of 60 and 69, 5.2% of Roth IRA investors took withdrawals, compared to 20.8% of traditional IRA investors. For those 70 or older, the difference is even more pronounced, with a mere 5.4% of Roth IRA investors taking withdrawals, versus 80.1% of traditional IRA investors.

ICI found that consistent Roth IRA investors showed little reaction to the steep decline in stock values between October 2007 and March 2008 and subsequent rising unemployment, although contribution activity did dip a bit. Forty-five percent of consistent Roth IRA investors aged 24 or older in 2013 contributed at least once to their Roth IRAs between tax year 2008 and 2013, and more than three-quarters contributed in multiple years.

Roth IRA assets were $232 billion at year-end 2007, but plummeted by 24% to $177 billion at year-end 2008 because of the economic crisis. Assets then rose to $355 billion by year-end 2010, to $505 billion at year-end 2013 and to $550 billion by year-end 2014. All told, between 2007 and 2013, Roth IRA assets rose by a significant 137%.

Likewise, the average balance for Roth IRA investors aged 24 to 59 showed strong growth between 2007, when it was $15,170, and 2013, when it had increased by 108% to $31,510. Among Roth IRA investors aged 70 or older, the average balance rose from $42,380 in 2007, to $70,940 in 2013—a 67% increase.

The report is based on the ICI and Securities Industry and Financial Markets Association (SIFMA) IRA Investor Database of more than 15 million IRA investors, 2.4 million of which are consistent Roth IRA investors, i.e. investors who held their accounts with the same provider every year from 2007 through 2013.

ICI’s full report on Roth IRA activity can be downloaded here.