THE FINANCIAL ADVISORS GUIDE TO IRAs (2015 Edition)

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1 THE FINANCIAL ADVISORS GUIDE TO IRAs (2015 Edition) Researched and Written by: Edward J. Barrett CFP, ChFC, CLU, CEBS, RPA, CRPS, CRPC

2 Disclaimer This book is designed as an educational program for insurance and financial professionals. EJB Financial Press is not engaged in rendering legal or other professional advice and the reader should consult legal counsel as appropriate. We try to provide you with the most accurate and useful information possible. However, one thing is certain and that is change. The content of this publication may be affected by changes in law and in industry practice, and as a result, information contained in this publication may become outdated. This material should in no way be used as a source of authority on legal and/or tax matters. Laws and regulations cited in this publication have been edited and summarized for the sake of clarity. Names used in this publication are fictional and have no relationship to any person living or dead. EJB Financial Press, Inc Congress St. New Port Richey, FL (800) This book is manufactured in the United States of America 2015 EJB Financial Press Inc., Printed in U.S.A. All rights reserved 2

3 ABOUT THE AUTHOR Edward J. Barrett CFP, ChFC, CLU, CEBS, RPA, CRPS, CRPC, began his career in the financial and insurance services back in 1978 with IDS Financial Services, becoming a leading financial Advisor and top district sales manager in Boston, Massachusetts. In 1986, Mr. Barrett joined Merrill Lynch in Boston as a Financial Advisor and then becoming the Estate and Business Insurance Planning Specialist working with over 400 Financial Advisors and their clients throughout the New England region assisting in the sale of insurance products. In 1992, after leaving Merrill Lynch and moving to Florida, Mr. Barrett founded The Barrett Companies Inc. and The Wealth Preservation Planning Associates, a financial and insurance brokerage agency. During the same period, Mr. Barrett also formed Broker Educational Sales & Training Inc., a premier provider of training and continuing education programs to financial and insurance professionals in all 50 states and the District of Columbia. Mr. Barrett is a highly sought after speaker for financial advisors, insurance professionals, attorneys, CPA s and general audiences. He has written over 1,000 financial articles for newspapers and magazines and has authored several books. Mr. Barrett has been a qualifying member of the Million Dollar Round Table, Qualifying Member Court of the Table and Top of the Table producer. He has a number of professional designations including: Certified Financial Planner (CFP), Chartered Financial Consultant (ChFC), Chartered Life Underwriter (CLU), Certified Employee Benefit Specialist (CEBS), Retirement Planning Associate (RPA), Chartered Retirement Planning Consultant (CRPC), and Chartered Retirement Planning Specialist (CRPS). EJB Financial Press EJB Financial Press, Inc. (www.ejbfinpress.com) was founded in 2004, by Mr. Barrett to provide advanced educational and training manuals approved for correspondence continuing education credits for insurance agents, financial advisors, accountants and attorneys throughout the country. Broker Educational Sales & Training Inc. Broker Educational Sales & Training Inc. (BEST) is a nationally approved provider of continuing education and advanced training programs to the mutual fund, insurance, financial services industry and an approved sponsor of CPE courses with the National Association of State Boards of Accountancy and Quality Assurance Service (QAS). For more information visit our website at: or call us at

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5 Table of Contents ABOUT THE AUTHOR... 3 CHAPTER 1 HISTORY OF IRAs Overview Learning Objective Background of IRAs Dual Purpose of IRAs Legislative Timeline of IRAs The IRA Market IRA Assets Incidence of IRA Ownership Increases with Age and Income Rollovers to Traditional IRAs Fuel Growth IRA Contributions GAO Report (15-16) Chapter 1 Review Questions CHAPTER 2 TRADITIONAL IRA Overview Learning Objectives Setting Up a Traditional IRA Individual Retirement Account Individual Retirement Annuity Traditional IRA Eligibility Requirements Compensation Defined Regular Annual Contributions Date of Regular Annual Contributions Contributions Returned Before Due Date of Return Deductible Contributions Active Participant Defined Deduction Phase-out MAGI Defined Non-Deductible Annual Contributions Excess Contributions Penalty for Excess Contribution Procedure Tax Reporting Spousal IRA Contributions Limits to Spousal IRA Deduction Limits for Spousal IRA Setting up the Account Deduction of Fees Chapter 2 Review Questions CHAPTER 3 SIMPLIFIED EMPLOYEE PENSION PLAN (SEP IRAs) Overview Learning Objectives SEP IRA Background

6 SEP IRA Advantages Tax Advantages for the Employer Tax Advantages for the Employee Non-Tax Advantages for the Employer Disadvantages of a SEP IRA SEP IRA Participation Requirements Self-Employed Individuals Establishing a SEP IRA Plan Depositing Employer Contributions IRS Form 5305-SEP Notice To Interested Parties Annual Reporting Investment Vehicles SEP IRA Nondiscrimination Rules Non- Forfeitable and Non- Assignable Employer Contributions Contribution Formulas Contribution Limits Contribution Limits for Self-Employed Excess Contribution Rule More Than One Employer Multiple Plans Deduction by the Employer SARSEP IRA Plans Contributions to SARSEP IRA Chapter 3 Review Questions CHAPTER 4 SIMPLE IRA Overview Learning Objectives SIMPLE IRA Defined Employer Eligibility Two-Year Grace Period Deadline to Set-up a SIMPLE IRA Employee Eligibility Requirements Required Enrollment Periods SIMPLE IRA Contributions Employee Salary Reduction Contributions Catch-Up Provision for Older Participants Employer Matching Contributions Employer Non-elective Contributions Tax Consequences of Contributions Vesting Requirements Distribution Rules Savers Tax Credit Chapter 4 Review Questions

7 CHAPTER 5 IRA ROLLOVERS Overview Learning Objectives Purpose of IRA Rollovers In-Direct Rollovers Day Eligibility Rule Waiver of 60-day Rule Month Rule IRS Announcement and Transition Rule Ignores Some 2014 Distributions Background of the One-Per-Year Rule Tax Consequences of the One-Rollover-Per-Year Limit Direct Rollovers IRA Rollover Rules after EGTRRA IRA Rollovers after PPA of IRS Notice IRS Notice Worker, Retiree, and Employer Recovery Act of IRS Notice Eligible Rollover Distributions Withholding Requirements from Qualified Plans IRA Rollover Withholding Rules FINRA Regulatory Notice Background FINRA and SEC Examinations Rollovers to IRAs: FINRA Regulatory Notice Reporting IRA Rollovers to the IRS Variety of IRA Rollovers IRS Notice After-Tax Rollover Rules In-Service Distributions Types of In-Service Distributions In-Service Distribution of Employer Contributions In-Service Distribution of Employer Contributions Restricted to Hardship Hardship Distributions of Employee Salary Deferrals Definition of Hardship Section 826 of Pension Protection Act of In-Service Distributions of Rollover Contributions Steps to Take Chapter 5 Review Questions CHAPTER 6 IRA DISTRIBUTIONS DURING PARTICIPANTS LIFETIME Overview Learning Objectives IRA Distribution Timelines Distributions Prior to Age 59½ The Exceptions

8 Series of Substantial Equal Periodic Payments Calculating the SOSEPP Payment Modification of SOSEPP Revenue Ruling Calculating the Three Methods Distributions from Ages 59½ and Deductible Contributions Nondeductible Contributions Distributions from Age 70½ Required Minimum Distributions Required Beginning Date (RBD) Calculating Required Minimum Distribution Penalties for Failure to Make Required Minimum Distributions IRS Life Expectancy Tables Uniform Lifetime Table Calculating RMDs Using the Uniform Lifetime Table Using the Joint Life Table Determination of Marital Status Qualified Charitable Distributions from IRAs Background Requirements for a QCD Chapter 6 Review Questions CHAPTER 7 RMDs AFTER IRA PARTICIPANT S DEATH Overview Learning Objectives Background Beneficiary Planning Changing Beneficiaries Types of Beneficiaries Per Stirpes vs. Per Capita Per Stirpes Per Capita Designated Beneficiary Rules Date to Determine the Designated Beneficiary Liberalized Rules Regarding Beneficiary Designations Beneficiary Determined After IRA Participant s Death Postmortem Planning Trust as a Designated Beneficiary Trusteed IRA vs. Custodial IRA Conduit Trust Accumulation Trust No Named Beneficiary after IRA Participant s Death Year Rule Year Rule under WRERA Death of Beneficiary Prior To Beneficiary Finalization Date Applying Distribution Rules: Death Prior to the RBD

9 Surviving Spouse as Beneficiary Non-Spouse Individual Designated Beneficiary Multiple Individual Beneficiaries (Designated Beneficiary) Trust as Beneficiary (Designated Beneficiary) Non-Designated Beneficiary Applying Distribution Rules: Death On or After the RBD Spouse as Designated Beneficiary Non-Spouse Individual Designated Beneficiary Multiple Individual Beneficiaries (Designated Beneficiary) Trust as Beneficiary (Designated Beneficiary) Non-Designated Beneficiary IRA Distributions Due to a Divorce Importance of Updating Beneficiary Designation Forms Lesson to be Learned Chapter 7 Review Questions CHAPTER 8 ROTH IRA Overview Learning Objectives Roth IRA Background Creating a Roth IRA Funding a Roth IRA Regular Annual Contributions Applicable Dollar Limit Defined MAGI Defined Roth IRA Annual Contribution Phase-out Rules Spousal Roth IRA Contributions Excess Contributions to Roth IRAs Withdrawals of Excess Contributions Corrective Action Roth IRA Conversions Eligibility Requirements for Conversion Conversion Methods Eligible Assets to Be Converted Prospects for Roth IRA Conversion Conversion Advantages Conversion of an Annuity Contract Background Current Valuation Rules Guaranteed Benefit Riders Reporting and Recharacterization Recharacterizations Reasons to Do a Recharacterization Recharacterization Requirements Recharacterization Deadlines Steps to Take for Recharacterizaton Notifying the Custodians

10 Assets That Cannot Be Converted Reconversion Time Line for Conversion, Recharacterization and Reconversion DRAC-to Roth IRA Rollover DRAC Contributions DRAC Rollovers The Five-Year Holding Period for Qualified Distributions Roth IRA Documents Must Be Amended DRAC-To-Roth-IRA Rollovers Allowed For High-Income Employees Small Business Job Protection Act of ATRA of 2102 Expands In-Plan Roth 401(k) Conversions Background Expansion of In-Plan Roth Conversions Benefits to Participants Chapter 8 Review Questions CHAPTER 9 ROTH IRA DISTRIBUTIONS Overview Learning Objectives Participant s Lifetime Distributions Qualified Distributions Nonqualified Distributions Ordering Rules Year Holding Period for Conversions Roth IRA Distributions after Participant s Death Spouse as Sole Designated Beneficiary Tax Reporting of Roth IRA Distributions Chapter 9 Review Questions CHAPTER 10 IRA INVESTMENTS Overview Learning Objectives Investment Providers and Investment Types Banks Time Deposit Open Account Special Certificates Of Deposit (CDs) Passbook Accounts Pooled Fund Insured Credit Unions Brokerage Houses Mutual Fund Companies Self-Directed IRAs Annuities inside IRAs The Double-Tax Deferred Question Advantages of Annuities inside an IRA Suitability Recommendations New RMD Rules on Variable Annuity Contracts Deduction of Fees inside an IRA

11 Fixed Fee in Lieu of Brokerage Commissions Prohibited Investments in an IRA Investment in Collectibles Life Insurance inside an IRA Prohibited Transaction Rule The Tax: General Rule Prohibited Transaction Defined Application of IRC Disqualified Person Defined The Willis Case Chapter 10 Review Questions CHAPTER 11 IRA CREDITOR PROTECTION Overview Learning Objectives Federal Bankruptcy Bankruptcy Estate Defined Solo Business Owners Qualify Assets for an Exemption IRAs in Bankruptcy Proceedings ERISA Protection Not Applicable to IRAs Rousey v. Jacoway Bankruptcy Abuse Protection and Consumer Protection Act of 2005 (BAPCPA) IRA Exemptions Following BAPCPA Post-BAPCPA Results BAPCPA Miscellany States Most Impacted Creditor Protection of Inherited IRAs Clark v. Rameker Facts Three Characteristics Referenced by the Court Planning After the Supreme Court Ruling Florida Update Ohio North Carolina Medicaid Planning and IRAs Chapter 11 Review Questions CHAPTER 12 ESTATE PLANNING WITH RETIREMENT ASSETS Overview Learning Objectives The Federal Estate Tax The American Taxpayers Relief Act of IRAs and Estate Planning QTIP Qualifications Income In Respect of a Decedent (IRD) Historical Development of IRD IRD Defined

12 IRD Property Deductions in Respect to a Decedent Calculation of the Deduction Chapter 12 Review Questions CHAPTER 13 MyRA Overview Learning Objective Background The Basics Benefits of myra Who Qualifies to Set Up myra How myra Works MyRA Portability Taking Withdrawals MyRA Program Trustee Chapter 13 Review Questions CHAPTER 14 COVERDELL EDUCATION SAVINGS ACCOUNT Overview Learning Objectives Background Establishing a CESA CESA Contributions CESA Contribution Limits Excess Contribution Penalty Special Needs Beneficiary Tax-Free Income Compounding In a CESA Withdrawals from the CESA Qualified Higher Education Expenses Qualified Elementary and Secondary Education Expenses Withdrawals for Contributions to IRC 529 Plans CESA Rollovers Disposition of Balance after Conclusion of Education Coordination with Tax Credits American Opportunity Tax Credit Lifetime Learning Credit Coordination with Other Types of Plans Qualified Tuition Programs (QTPs) Distributions from IRAs Disallowance of Benefits IRC 162 and Chapter 14 Review Questions CHAPTER REVIEW ANSWERS APPENDIX IRA STATE CREDITOR EXEMPTIONS CONFIDENTIAL FEEDBACK

13 CHAPTER 1 HISTORY OF IRAs Overview In 1972, Congress enacted (and President Gerald R. Ford signed into law) the Employee Retirement Income Security Act (ERISA). The purpose of the Act was to protect and enhance Americans retirement security by establishing comprehensive standards for employee benefit plans. The Act also created the Individual Retirement Account, or IRA. This chapter will examine the background and the dual purpose of the Individual Retirement Arrangement (IRAs), as well as their legislative history and current market overview. Learning Objective Upon completion of this chapter, you will be able to: Explain the intent and purpose of Congress in developing the IRA; Outline the various legislative changes that have affected the IRA since its inception; and Present the growth and current market opportunity with IRAs. Background of IRAs The Employee Retirement Income Security Act (ERISA) was signed into law in ERISA established for the first time comprehensive standards to help protect the retirement programs of Americans, and also created the Individual Retirement Account, or IRA. Dual Purpose of IRAs To give the new account flexibility in accumulating assets for retirement, Congress designed a dual role for the individual retirement arrangements (IRAs). 13

14 First, to give individuals not covered by retirement plans at work an opportunity to save for retirement on their own in tax-deferred accounts made available through private financial institutions. Secondly, to give retiring workers or individuals changing jobs a means to preserve employer-sponsored retirement plan assets by allowing them to transfer, or roll over, plan balances into IRAs. Eligible workers under the age of 70 ½ annually could contribute to an IRA the lesser of $1,500 or 15 percent of compensation. Individuals did not pay income taxes on these contributions (after-tax, non-deductible, contributions were not allowed), but rather the contributions and investment earnings were taxed when withdrawn from the IRA. To facilitate the preservation of retirement savings accrued in the workplace, the original IRA legislation also permitted workers in employer-sponsored retirement plans to transfer, or roll over, plan assets into traditional IRAs, when retiring or changing jobs. This feature continues to be very important to preserve assets accumulated in employersponsored plans for retirement in tax-advantaged specially earmarked accounts (see Chapter 6 IRA Rollovers). The IRA was immediately popular, with contributions totaling $1.4 billion in 1975, the first year in which the new savings instrument was available. Legislative Timeline of IRAs Since Congress created the Original, or Traditional IRA (see Chapter 2), Congress has changed eligibility and distribution rules several times and added new types of IRAs. In 1978, Congress passed The Revenue Act of 1978 (TRA) which established the Simplified Employee Pension (SEP) IRA an employer-based IRA (see Chapter 3). In 1981 Congress passed The Economic Recovery Tax Act (ERTA), which included provisions to encourage Americans to save through IRAs. Starting in 1982 the Act raised the annual contributions limit to the lesser of $2,000 or 100 percent of compensation (Note: A total of $2,250 or 100 percent of compensation could be contributed by an individual taxpayer and a non-working spouse outside of the home, and the overall limit no longer had to be divided equally with the spouse, but of course neither individuals IRA could accept more than the $2,000 limit). Furthermore, it made the IRA universal by allowing any individual taxpayer under the age of 70 ½ with earned compensation to make a taxdeductible contribution to an IRA regardless of retirement plan coverage. Thus any individual participating in an employer-sponsored retirement plan was eligible to make a tax-deductible Traditional IRA contribution. During this period when IRA rules were simplified and eligibility was expanded, Traditional IRA contributions rose sharply, averaging $34.4 billion per year from 1982 through

15 In 1986, concerned about the performance of the economy, Congress passed the Tax Reform Act of 1986 (TRA), which eliminated universal deductible IRA eligibility. The Act re-established employer-sponsored retirement plan coverage as the basis for eligibility to make tax-deductible contributions to IRA (see Chapter 2). However, TRA of 1986, for the first time allowed individual taxpayer s under the age of 70 ½ with earned compensation (income) to make non-deductible (after-tax) contributions (irrespective of retirement plan coverage at work). The result of these new provisions of TRA of 1986 was to drastically reduce deductible contributions and reduce participation among many households who continued to be eligible. In 1987, the first year the new provisions were in effect, the IRS reported that deductible contributions were $1.4 billion down from the $37.8 billion in In 1996, Congress passed the Small Business Job Protection Act of 1996, which created the Savings Incentive Match Plan for employees, or SIMPLE IRA, an account targeted to small businesses (see Chapter 4). In 1997, Congress eased restrictions on eligibility in the Taxpayers Relief Act of 1997, which became effective on January 1, 1998, by raising the income limits that determine whether an individual taxpayer covered by an employer-sponsored retirement plan is also eligible to make deductible IRA contributions. In addition, Congress allowed spouses not covered by an employer-sponsored retirement plans at work to make tax-deductible contributions irrespective of their spouse s coverage (see Chapter 2). Despite these measures, deductible contributions in the late 1990 s and early 2000 s remained well below the high levels reached between 1982 through 1986 period of universality. However, a new IRA was created under the TRA of 1997, known as the Roth IRA a retirement savings account for after-tax contributions. (See Chapter 5) In 2001, Congress passed The Economic Growth Tax Relief and Reconciliation Act of 2001 (EGTRRA) which increased the amount of contributions as well as allowing a catch-up contribution for those participants age 50 and older. EGTRRA provisions also created the Deemed IRA and the Roth 401(k) (See Chapter 7). In 2005, Congress passed the Tax Increase Prevention Reconciliation Act of 2005, which made sweeping changes to the Roth IRA (see Chapter 5). In 2006, Congress passed the Pension Protection Act of 2006 (PPA), which makes permanent a number of provisions of EGTRRA that were going to sunset. In 2008, Congress passed and President George W. Bush signed into law on December 23, 2008, The Workers, Retiree, and Employer Recovery Act of 2008 (WRERA), the law temporarily (2009 only) suspended the requirement for taxpayers age 70½ and older (and their beneficiaries) to take annual required minimum distributions from their retirement accounts (see Chapter 7 and 8). The Act also includes some clarification for non-spouse beneficiary s inherited IRA rollovers (see Chapter 8). May 2010, The Small Business Job Act, Sections 2111 and 2112 of this new legislation, permits participants in 401(k) 403(b) and governmental 457 plans to make in-plan Roth conversions of their pre-tax employee contributions effective for distributions made after September 27, 2010 (see Chapter 5). 15

16 December 2010, The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act (TRA) of 2010, The Act contains a provision extending qualified charitable IRA distributions through the 2010 and 2011 tax years (see Chapter 7). December 2012, The American Taxpayers Relief Act (ATRA) of 2012, provides a new provision expanding the ability for employees to convert traditional retirements accounts (like 401(k), 403(b) and government sponsored 457(b) plans) into Roth 401(k) accounts (see Chapter 5). And, the Act also extended through 2013, the qualified charitable IRA distributions which was originally enacted by WRERA of 2008 and extended by TRA of 2010 through 2010 and 2011 tax years (see Chapter 7). The IRA Market According to the Investment Company Institute (ICI) report, 2014 Investment Company Fact Book, total U.S. retirement assets were $23.0 trillion at year end 2013 (See Figure 1.1). The largest components of retirement assets were IRAs holding $6.5 trillion. Employer-sponsored DC plans held $5.9 trillion while other employer-sponsored plans include private sector DB pension funds at $3.0 trillion, state and local government employee retirement plans at $3.9 trillion, and federal government plans which include both federal employees DB plans and the Thrift Savings Plan at $1.8 trillion. In addition, annuity reserves outside of retirement plans were $2.0 trillion at year end Figure 1.1 U.S. Total Retirement Market $23.0 Trillion (2013) Private DB Plans, $3.0 Federal Pension Plans, $3.0 IRAs, $6.5 State & Local Gov't Pensions, $3.9 Annuities $ 2.0 DC Plans, $5.9 Source: ICI 2014 Investment Company Fact Book; 16

17 Recently, ICI estimated in their report, The U.S. Retirement Market, Third Quarter 2014, that retirement assets increased to $24.2 trillion as of September 30, Retirement savings accounted for 36 percent of all household financial assets in the United States at the end of the third quarter of IRA Assets IRAs continue to gain in importance as a retirement asset for individuals. IRAs have become the number #1 retirement investment vehicle with $6.5 trillion in assets at the end of the fourth quarter of 2013 (see Figure 1.2). Individual Retirement Accounts (IRAs) represented more than one-quarter of U.S. total retirement market assets, compared with 16 percent two decades ago. Figure 1.2 IRA Assets (Billions of dollars) $7.0 $5.6 $6.5 $6.0 $4.7 $5.0 $5.0 $5.0 $4.2 $4.5 $4.0 $2.6 $2.5 $2.5 $3.0 $3.3 $3.4 $3.7 $3.0 $2.0 $1.0 $0.5 $ Source: The U.S. Retirement Market; ICI, April, 2014 The Investment Company Institute has estimated that as of September 30, 2014, IRA assets have grown to $7.3 trillion dollars which represents 30 percent of all retirement assets. In its research article titled, The Role of IRAs in U.S. Households Saving for Retirement 2013 the Investment Company Institute ( ICI) reported that IRAs have risen in importance on household balance sheets, by increasing 9 percent of all household assets through June 2013, up from 4 percent of assets two decades ago. In May 2013, 46.1 million, or 38 percent of, U.S. households reported owning IRAs (see Table 1.3). Among all IRA-owning households in May 2013, 84 percent also participated in employersponsored retirement plans; that is, they had defined contribution (DC) plan balances, current defined benefit (DB) plan payments, or expected future DB plan payments. Another 29 percent of U.S. households reported employer-sponsored retirement plan coverage, but no IRAs. All told, 67 percent of all U.S. households had some type of formal, tax-advantaged retirement savings. 17

18 Traditional IRAs are the oldest and most common type of IRA. In 2013, 36 million, or 29.4 percent of U.S. households owned Traditional IRAs (see Table 1.3). In addition to being a repository for contributions, the Traditional IRA is a vehicle for rollovers from employer sponsored retirement plans. Indeed, more than half of U.S. households with Traditional IRAs indicated their IRAs contained rollover assets. Roth IRAs, which were first available in 1998, are the second most frequently owned type of IRA, owned by 19.1 million, or 15.6 percent of U.S. households. In May 2013, 7.5 percent of U.S. households owned employer-sponsored IRAs, which include SEP IRAs, SAR-SEP IRAs, and SIMPLE IRAs. TYPE OF IRA Traditional IRA SEP-IRA² SAR-SEP IRA² SIMPLE IRA² Roth Table 1.3 Millions of U.S. Households Own IRAs Percentage of U.S. Households, 2013 YEAR CREATED 1974 Employee Retirement Income Security Act (ERISA) 1978 Revenue Act 1986 Tax Reform Act 1996 Small Business Job Protection Act 1997 Taxpayer Relief Act Number of U.S. Households with Type of IRA¹, 2013 Percentage of U.S. Households with Type of IRA¹, million 29.4% 9.2 million 7.5% 19.1 million 15.6% Any IRA¹ 46.1 million 37.6% ¹ Households may own more than one type of IRA ²SEP IRAs, SAR-SEP IRAs, and SIMPLE IRAs are employer sponsored IRAs. Source: Investment Company Institute Annual Mutual Fund Shareholder Tracking Survey and U.S. Census Bureau; Incidence of IRA Ownership Increases with Age and Income People of all ages own IRAs, but ownership is greatest among the older groups of working-age individuals. This reflects the life-cycle effects on saving; that is, households tend to focus on retirement-related saving as they get older (and save for other goals such as education or buying a house when younger). Also, many Traditional IRA owners became owners as a result of rollovers from employer-sponsored plans, which occur after at least some years in the workforce. In 2013, 42 percent of households headed by an individual aged 45 to 54 owned IRAs, and 45 percent of households headed by an individual aged 55 to 64 owned IRAs (see Table 1.4). As a result, 67 percent of IRAowning households were headed by individuals aged 45 or older (see Table 1.5). Among 18

19 all U.S. households, by comparison, 62 percent were headed by individuals in this age group. Table 1.4 Incidence of IRA Ownership Greatest Among 35- to 64-Year-Olds Percentage of U.S. households with in each age group that own IRAs, ¹ ² Younger than to to to or older Age of Households¹ ¹Age is based on the age of the sole or co-decision maker for household saving and investing ² IRAs include Traditional IRAs, Roth IRAs, and employer-sponsored IRAs (SEP IRAs, SAR-SEP IRAs, and SIMPLE IRAs) Source: Investment Company Institute Annual Mutual Fund Shareholder Tracking Survey Table 1.5 Most IRA-Owning Households Are Between 35 and 64 Percent Distribution of households owning IRAs and all U.S. households by Age,¹ ² or older 55 to to to 44 Younger than 35 Households Owning IRS Median: 52 Years Mean: 53 Years All U.S. Household Median: 51 Years Mean: 51 Years ¹Age is based on the age of the sole or co-decision maker for household saving and investing ² IRAs include Traditional IRAs, Roth IRAs, and employer-sponsored IRAs (SEP IRAs, SAR-SEP IRAs, and SIMPLE IRAs) ³ The percentage of all households in each age group is based on ICI survey data and is weighted to match the U.S. Census Bureau s Current Population Survey. Source: Investment Company Institute Annual Mutual Fund Shareholder Tracking Survey and U.S. Census Bureau. Although the majority of IRA-owning households had moderate incomes, IRA ownership tends to increase with household income. This pattern is consistent with the fact that lower-income households, which tend to be focused on near-term spending needs, and which get a higher replacement benefit through Social Security, generally have a lower 19

20 propensity to save for retirement. Fifty-four percent of households with incomes of $50,000 or more owned IRAs, compared with 21 percent of households with incomes of less than $50,000 (see Table 1.6). Sixty-four percent households with incomes of $100,000 or more owned IRAs in As a result, 16 percent of households owning IRAs earned less than $35,000, compared with 36 percent of all U.S. households (see Table 1.7). Forty-seven percent of households owning IRAs in 2013 had incomes between $35,000 and $99,999, compared with 42 percent of all U.S. households. Table 1.6 Incidence of IRA Ownership Increases with Household Income Percentage of U.S. households within each income group that own IRAs,¹ ² 2013 Household Income ¹ $200,000 or more 69 $75,000 to $99,000 $35,000 to $34,999 Less than $25, % Less than $50,000 54% $50,000 or more ¹Total reported is household income before taxes in ² IRAs include Traditional IRAs, Roth IRAs, and employersponsored IRAs (SEP IRAs, SAR-SEP IRAs, and SIMPLE IRAs). Source: Investment Company Institute Annual Mutual Fund Shareholder Tracking Survey Table 1.7 Most IRA-Owning Households Have Moderate Incomes Percent distribution of households owning IRAs and all U.S. households by household income,¹ ² Households Owning IRS All U.S. Household $200,000 or more $100,000 to $199,000 $75,000 to $99,000 $50,000 to $74,999 $35,000 to $49,999 $25,000 to $34,999 Less than $25,000 Median:$80,000 Median: $50,000 Mean:$104,500 Mean: $75,700 ¹Total reported is household income before taxes in ² IRAs include Traditional IRAs, Roth IRAs, and employer-sponsored IRAs (SEP IRAs, SAR-SEP IRAs, and SIMPLE IRAs)³ The percentage of all households in each age group is based on ICI survey data and is weighted to match the U.S. Census Bureau s Current Population Survey (CPS). For 2012, the estimated median and mean income for all U.S. households from the CPS is $51,017 and $71,274 respectively. Source: Investment Company Institute Annual Mutual Fund Shareholder Tracking Survey and U.S. Census Bureau. 20

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