Investing in an IRA? Well, You Are The Exception

[ExFlyBoy5]

I read this article and was taken aback at the number...only 8%? I understand some folks will contribute to a 401K or similar plan and not invest in an IRA, but I was still shocked. Perhaps the notion of, "most people couldn't come up with $400 in an emergency" isn't too far off the mark.

The IRS recently released Individual Retirement Arrangement (IRA) data for the 2015 tax year, and there's one shocking statistic that stands out:

Only 8% of eligible taxpayers chose to contribute to an IRA of any kind.

https://www.fool.com/retirement/2018/04/28/only-8-of-americans-are-making-this-smart-retireme.aspx

 

[beowulf]

Without knowing why they don't contribute, the data is disappointing, but somewhat meaningless. The normal advice to employees is to first max out their 401K, TSP, etc., to the max of the employer match. This may be all many can afford. I suspect that may be part of the low IRA number. Another factor could be whether or not your employer supports a Roth 401K. That might also affect the decision of where to contribute. We are also talking about the average American, not ER folks, not Bogleheads, but those who earn barely enough to sustain the lifestyle they want. It wasn't until our late 40's, when the kids were gone and finished with college that we felt comfortable enough to max out every tax advantaged plan we could take advantage of. Not everyone can manage that at any age.

 

[USGrant1962]

The odd thing about tIRAs is that when you can afford to contribute, the tax deduction phases out. So half the people (say under the median income) can't really afford to contribute, and a good fraction of the rest don't get a tax deduction.

 

[jazz4cash]

Agree with Beowulf. The tax break is not that attractive.

 

[ownyourfuture]

Not everyone can manage that at any age.

Agree with everything you said, but I'd love to see a detailed survey specifically for those who claim that they 'can't manage' to save anything. I'd be willing to bet that many of them have expensive automobiles, top-of-the-line flat screen TVs, HD programming, high end cell phones with unlimited minutes, text, data, Etc.

I've known a lot of people exactly like that.

 

[Freedom56]

I stopped contributing to an IRA or Roth IRA a long time ago due to the AGI cutoff. I always contributed the maximum to a 401K which was matched 100% by our company. After I turned 50, I also included the catch-up contribution which was also matched 100%. You had to be a complete idiot not to contribute and yet only 40% of our senior management did so. I guess they preferred to spend their money on their toys. It's a free country. People can do what they want.

 

[Amethyst]

I do not know one single person who does not/did not max out his/her TSP. I have heard whispers of those who borrowed from their TSPs, but these were considered financial daredevils.

 

[Mdlerth]

Irony wrapped in a paradox, inside a contradicton

You had to be a complete idiot not to contribute and yet only 40% of our senior management did so.

Could this be a good thing for everybody else? There's some IRS babble* about limits on 401k contributions by "highly compensated employees". If a bunch of the top management (presumably the very highest compensated) forgo contributing, does that leave more room for HCEs who aren't top execs to contribute the full maximum?

Perhaps somebody who understands it better could educate us.

* - I have tried to read about this, but the Revenue Complicators at Treasury have successfully made the regulations unintelligible.

 

[Winemaker]

DW and I contributed the max to our 401k, 403b, tIRA, and Roth since the very beginning. WE have been blessed to be able to do that, FIRE at 56, and look forward to paying Uncle Sam, figuratively, not literally.

 

[omni550]

Could this be a good thing for everybody else? There's some IRS babble* about limits on 401k contributions by "highly compensated employees". If a bunch of the top management (presumably the very highest compensated) forgo contributing, does that leave more room for HCEs who aren't top execs to contribute the full maximum?

Perhaps somebody who understands it better could educate us.

* - I have tried to read about this, but the Revenue Complicators at Treasury have successfully made the regulations unintelligible.

Perhaps this explanation might help https://www.goodfinancialcents.com/401k-limits-for-highly-compensated-employees/


omni

 

[GrayHare]

The odd thing about tIRAs is that when you can afford to contribute, the tax deduction phases out. So half the people (say under the median income) can't really afford to contribute, and a good fraction of the rest don't get a tax deduction.

Even without the tax break, if they are putting away at least some money they can back-door convert it to Roth at no cost and enjoy tax-free growth. I would guess many people who can afford to do that fail to do so simply because the tax-deferred saving system has become so complex with options they've tuned out.

 

[Sojourner]

I always maxed out my 401(k) every year it was available to me, even in recent years via my solo 401(k). And I almost always made an IRA contribution, even in years when I couldn't claim any sort of tax deduction. I'd imagine that likely puts me in the top 2-3% of people who can contribute to those sorts of retirement accounts.

I remember being shocked when I found out that fewer than half of my coworkers at a former company were contributing anything to their 401(k), and that I was one of only a small handful who were maxing out their contributions. Considering that, I would not at all be surprised if just a few of us were contributing to IRAs, as well. I think it goes without saying that most people just don't prioritize saving for retirement, but it is always a bit surprising to hear these statistics and realize how rare the FIRE mindset and lifestyle really is.

 

[NW-Bound]

We always maxed out 401k contributions at megacorps. And we also did tIRA whenever we were eligible. But in later years, with higher income even Roth IRA was disallowed.

 

[meierlde]

As stated this was a poorly formed question, the better question is are you contributing to a retirement savings plan, such as an IRA, 401k 403b etc. In the case of the highly comphensated folks there is a possiblity that they are bonus eligible and are putting the money into a non ERISA company plan. (Although it should be noted at a reading of many proxy statements also say that the companies offer a non ERISA savings plan sort of like a 401k for those whose income is above the 401k limit.) (Plus of course the ability to put the bonuses and stock options into deferred income plans)

 

[Z3Dreamer]

I guess I am one of those who has not contributed to my IRA or 401k in years, even though I had the funds to do so. During that time I bought some pretty nice toys and went on some fun vacations.

OH, WAIT! I maxed out for about 35 years then FIRE'D. I have not had any wages on which to contribute..........

 

[RobbieB]

I did the IRA when I could, then 401K precluded any further use.

 

[meierlde]

BTW at least at the two megacorps I worked out you could contribute after tax dollars to the 401k and have the increase not taxable until you withdrew. Given the choice between this and a non deductable IRA contribution, the choice is clear. (This is how big corps did it before the 401k was brought out, they had a savings plan that worked this way, so it was still left). When I rolled the 401k over to an IRA I withdrew the taxed contributions at the time (no tax effect)). So if the plan is big enough or old enough, folks would be smart to do this rather than a non deductable ira if the plan includes it.

 

[beowulf]

Even without the tax break, if they are putting away at least some money they can back-door convert it to Roth at no cost and enjoy tax-free growth. I would guess many people who can afford to do that fail to do so simply because the tax-deferred saving system has become so complex with options they've tuned out.

The no cost back door conversion option to a Roth IRA is only true is you have no other money in an IRA. If you do, part of the amount you are converting is taxable at your highest marginal rate based on what percentage the conversion amount is of all your IRA holdings. If you convert $20K and have $200K already in an IRA, you will pay taxes on 90% of the $20K, or $18K. The only way it would be tax free is if you had no tax deferred IRA holdings. That’s a hidden trap many people miss until it’s too late.

 

[RunningBum]

I don't think I ever contributed to any kind of IRA, so I'm not an exception, and the OP may be taken aback by me. I did contribute to a 401K, rolled that over to an IRA, and am converting that to a Roth over the years, but as the statement is made, I never contributed to an IRA.

 

[ExFlyBoy5]

I don't think I ever contributed to any kind of IRA, so I'm not an exception, and the OP may be taken aback by me. I did contribute to a 401K, rolled that over to an IRA, and am converting that to a Roth over the years, but as the statement is made, I never contributed to an IRA.

I wasn't really "taken aback" by any certain person, I was just surprised at the low number of folks that invested in IRAs when they were eligible to do so. And I do realize that a large number of folks DO contribute to 401Ks, TSPs, etc...but I would bet that number isn't very large, either. But...I would be willing to bet that 80% of the same demographic have a smart phone that is no more than 18 months old!

 

[RAE]

I do not know one single person who does not/did not max out his/her TSP.

When I was working, there were several people in my office who contributed either nothing or very little to their TSP. These are folks who basically live paycheck-to-paycheck. The country is full of folks who live like that.

 

[googily]

I don't think I ever contributed to any kind of IRA, so I'm not an exception, and the OP may be taken aback by me. I did contribute to a 401K, rolled that over to an IRA, and am converting that to a Roth over the years, but as the statement is made, I never contributed to an IRA.

Ditto on all counts.

 

[GrayHare]

The no cost back door conversion option to a Roth IRA is only true is you have no other money in an IRA. If you do, part of the amount you are converting is taxable at your highest marginal rate based on what percentage the conversion amount is of all your IRA holdings. If you convert $20K and have $200K already in an IRA, you will pay taxes on 90% of the $20K, or $18K. The only way it would be tax free is if you had no tax deferred IRA holdings. That’s a hidden trap many people miss until it’s too late.

That's true, plus a good example of the FUD factor that scares away people. Of course, the people being discussed in this topic haven't been contributing to a tIRA and so don't have tIRA money to be taxed upon back-door conversion to Roth of a fresh tIRA contribution.

 

[googily]

That's true, plus a good example of the FUD factor that scares away people. Of course, the people being discussed in this topic haven't been contributing to a tIRA and so don't have tIRA money to be taxed upon back-door conversion to Roth of a fresh tIRA contribution.

Or, conversely, their only IRA (like mine) is a rollover 401k that's never been contributed to, and so it's all pre-tax money, which costs more, of course, but is simpler.

 

[bw5972]

I did 32 years with a single company and never had an IRA. Contributed to the 401k for 31 of those years.