The Forgotten Retirement Account

Hal Bundrick for MainStreet.com writes: It's the forgotten – or at least neglected – retirement savings account, under utilized by Americans. As the 2013 income tax filing deadline looms, only a few investors will rush to claim a tax deduction by making a contribution to an individual retirement account (IRA). In fact, only 8.4% of traditional IRA investors aged 25 to 69 made a contribution during the last tax year of 2012.

IRAs don't appear to be as much a savings vehicle as a rollover account. A new study by the Investment Company Institute (ICI) reveals that nearly nine out of ten traditional IRAs opened in 2012 were created to accept a rollover from a 401(k) or other qualified employer-sponsored retirement plan.

"IRAs are a key component of the retirement landscape with a total of $6.2 trillion held in all forms of IRAs as of September 2013," says Sarah Holden, senior director of retirement and investor research at ICI. "And while in recent years most traditional IRAs are created through rollovers, traditional IRAs represent an important contributory savings vehicle, especially for workers without retirement plans through their employers."

But with such a low contribution rate to IRAs, Americans may be missing an important component to their retirement savings strategy. And missing an important tax benefit.

Workers and their spouses, with or without an employer-sponsored retirement plan like a 401(k), can make deductible or non-deductible traditional IRA contributions. And for those that qualify for the deduction, there is still time to take that tax break for 2013. Contributions to IRAs can be made until the due date for tax returns: April 15.

For the small group of investors who do make contributions to their IRAs, they do so with regularity. The ICI research found that more than two-thirds of traditional IRA investors contributing at the highest-allowed limit in 2011 did so again in 2012.

And those 5.5 million consistent IRA investors weathered the financial crisis well, even thoughaccount balances fell sharply after the 2008 market decline. The average traditional IRA balance for investors who maintained account balances in all years between 2007 and 2012 was higher at year-end 2012 than at year-end 2007. That increase reflects a total of contributions, rollovers, conversions, withdrawals, and investment returns.

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