The Limitations of a Roth IRA
New data confirm that Individual Retirement Accounts (IRAS) can be quite useful, but not in the way you might suspect.
IRAs are usually touted as a great tax-deferred way to save for retirement. But, because of the extremely low limits on how much money can be put into IRAs each year, we don’t actually deposit much in them.
Only 26% of Roth IRA owners and 6% of traditional IRA owners contributed anything to their accounts in 2011, according to the Employee Benefit Research Institute (EBRI).
Individuals with a Roth IRA had an average balance of $25,228 and a median balance of $11,344 in 2011.
Individuals with a traditional IRA originating from rollovers had a much larger average balance of $110,918 and a median balance of $31,944.
That huge difference between the average and median balance is important because it indicates that there are some really big IRAs out there.
That brings us to how we’re really using IRAs — as a tax-free place to stash our much larger holdings in employer-based 401(k) retirement plans when we change jobs.
In fact, close to 13 times more money has been added to IRAs through rollovers than from new contributions, according to the EBRI.
Tight Contribution Limits
This really shows is that the rules and regulations currently governing IRAs make them a lot more valuable for rollovers than as a place for primary savings.
The main problem is that contributions were limited to $5,000 — $6,000 if you were age 50 or older — in 2011. While that’s been raised to $5,500 — $6,500 if you’re age 50 or older — for 2013, it still isn’t enough.
Don’t get me wrong, these are good accounts to have, especially if you don’t have access to a 401(k) plan through your job. Anyone rolling 401(k) plans into IRAs is absolutely doing the right thing.
There are no penalties or tax burdens when you roll your money over into a traditional IRA, making them extremely useful accounts.
As a primary savings vehicle, they just aren’t working as well as many Americans need. Congress simply must raise the limits on how much savers can contribute — and not by just $500 or even $1,000 a year.
Why not allow us to put as much in our IRAs as we’re allowed to put in 401(k)s — $17,500 this year and $23,000 for savers 50 and over?
That seems particularly fair for families who don’t have access to a 401(k) plan through their work while making IRAs a much more valuable place to stash new money.
And it’s being able to save more that really puts points on the scoreboard for our retirement future.