Individual Retirement Accounts Are Not Being Used as Intended

Savings Beagle’s primary focus is providing you, our readers, with deals and savings tips and advice to make the most of what you spend.

Our secondary focus, however, is to stress the importance of taking command of your financial well-being, and emphasize a personalized savings strategy that will benefit you over the long run.

Which is why we occasionally publish articles regarding stock market returns, government actions (or inaction) related to personal finance matters and general money matter related topics.

Not exactly pieces that will get you in on the next great deal, but important nonetheless.

I found this recent piece in The Wall Street Journal interesting.

The article, written by Lauren Weber, is titled, “IRAs Mostly Serve People Who Need Them the Least.” As with most Wall Street Journal articles, it’s behind a pay firewall, so unless you’re a subscriber, you won’t be able to read it in its entirety.

The article’s general gist is that a recent analysis shows the majority of IRA contributions are a result of employees rolling over 401(k) accounts when changing jobs, not from individuals saving for retirement.

This is not what Congress intended when Individual Retirement Accounts were created over 40 years ago.

The article states, “IRAs were intended to give workers without employer-sponsored programs – typically those who work in small businesses or are self-employed – access to tax-advantaged retirement savings plans.”

It goes on, “IRAs do little to encourage active saving by the workers for which they were designed, said Anqi Chen, a research associate at the center [The Center for Retirement Research at Boston College] and co-author, with Alicia Munnell, of the new paper analyzing IRAs.”

That really needs to change.

Individual Retirement Accounts are great long-term saving vehicles.

• Traditional IRAs offer tax-deferred earnings growth. Taxes are paid on investment gains when IRA withdrawals are made in retirement. And, if you’re not covered by a retirement plan at your workplace, the entire amount of your IRA contribution is tax deductible up to a specific contribution level.
• Roth IRAs offer tax-free growth and withdrawals in retirement. Roth IRA contributions, however, are not tax deductible. A nice benefit of a Roth, though, is that contributions can be made even if you have access to an employer-sponsored retirement plan.

There really is no reason everyone shouldn’t have one of these plans into which some money is automatically deposited.

They are very easy to set-up and the process for automatically pulling a set amount of money from your checking or savings account at pre-determined intervals is simple, as well.

And, as we are all well aware, the only foolproof way to save is to move the money out of easy reach before you have the chance to do otherwise.

Leave money in an easily accessible checking or savings account, and most of us will find something on which to spend it.

Any number of financial institutions can help with opening an IRA.

If you’re at a complete loss for where to start, the Vanguard Group is as good as any.

You can read through Vanguard’s IRA information and begin the process, all online.

The Wall Street Journal piece ends with the study’s authors recommending that federal or state governments automatically enroll workers without employer savings plans in IRAs. Contributing would be the responsibility of the worker, but the hard part – actually setting up the account – would be done for them.

I lean more toward personal responsibility and freedom of choice for most aspects of our lives, but considering the serious nature of Americans’ saving deficit, and the significant fiscal issues facing the U.S. government, a “friendly nudge” toward more personal saving just may be the way to go.

What are your thoughts on IRAs? Should account creation be automatic? What about automatic contributions unless an individual opts out?

image courtesy of Stuart Miles at freedigitalphotos.net