Individual Retirement Account (IRA) Ownership: Data and Policy Issues

"Retirement income in the U.S. can come from multiple sources—Social Security, savings in employer-sponsored plans (e.g., public and private defined benefit plans and defined contribution plans), and private savings (e.g., annuities, other investments, individual retirement accounts [IRAs]). This report focuses on IRAs, which are tax-advantaged accounts for individuals to save for retirement.In 2019, about 25% of U.S. households owned IRAs.
 

 IRAs were first authorized by the Employee Retirement Income Security Act of 1974 (ERISA; P.L. 93-406) for two reasons: (1) to encourage workers without access to employer-sponsored plans to save for retirement and (2) to allow workers with employer plans to roll over their savings and retain tax advantages. Though eligibility was originally limited to workers without pension coverage, subsequent legislation expanded eligibility to nearly all workers. In 1997, Congress authorized a new type of IRA—the Roth IRA.
 

 Traditional and Roth IRAs differ based on their tax treatment. Contributions to traditional IRAs may be deductible from taxable income while withdrawals are included in taxable income. Contributions to Roth IRAs are not deductible, but qualified withdrawals are not included in taxable income; investment earnings grow tax free.
 

 IRAs are funded by contributions and rollovers. Contributions are subject to an annual limit. In 2020, this limit is $6,000 ($7,000 for individuals ages 50 and over). A rollover occurs when assets are transferred from one retirement plan,such as an employer-sponsored401(k), to another. Rollovers are not subject to the contribution limit. Most inflows to traditional IRAs are from rollovers, while most inflows to Roth IRAs are from contributions

Individuals with IRAs can choose their investments based on options provided by their financial institutions. Contributions, rollovers, and any investment earnings can be used as a source of income in retirement. To discourage IRA owners from withdrawing funds prior to retirement, the Internal Revenue Code imposes a 10% penalty on most early withdrawals, with several exceptions outlined in Title 26, Section 72(t), of the United States Code. Aside from these exceptions, Congress has temporarily exempted early IRA withdrawals from the penalty following certain past events, including multiple natural disasters and,most recently, the Coronavirus Disease 2019 (COVID-19) pandemic..."
Individual Retirement Account