As employers try to figure out how best to prepare their workforces for retirement, experts in the benefits and investment industries recommend that an individual retirement account either the traditional or Roth version can be a good complement or standalone option for an employees retirement path.
The 40-year-old IRA, a retirement product first introduced by Congress following enactment of the Employee Retirement Income Security Act, has grown to represent almost one-quarter of the countrys retirement assets. But the Employee Benefit Research Institute finds 21% of traditional and Roth IRA accounts saw withdrawals in 2012.
Typically, for traditional IRAs, participants pay taxes when they withdraw their money, but for Roth IRAs it is the exact opposite; all taxes are paid at the front end when first deposits are made. Afterwards, all deposited money can grow tax-free.
Craig Copeland, a senior research associate at EBRI, says that communicating the benefits of the IRA is in the best interests of HR and retirement benefit managers as well as their plan participants.
The IRA is a way to preserve your tax-deferred savings until you reach retirement age, so that would be an important [way] for employers to educate employees on a potential [place] to put that money, says Copeland.
A hefty portion of IRA assets are sourced from employer-sponsored defined benefit and 401(k) retirement plans that were shifted through rollovers following a job change.
Copeland explains that if employers can build that education program into their own plan, the IRA decision should hopefully follow.
[Employees] get the extra tax penalties and taxes in general when they switch jobs, or when they retire it allows them to take it out in a gradual way, Copeland continues.
Meanwhile, while the traditional IRA moves were right in line with the federally mandated retirement age of 70 ½, Roth IRA account moves have largely been initiated by a younger group to meet hardships or pay monthly bills. Approximately 44% were younger than age 50 and less than 10% were older than 71.
David C. John, a senior strategic policy advisor at the AARP Public Policy Institute, notes that shifts to IRAs and Roth IRAs, due to their varying income requirements, have been proven options for when retirement nears or following a change of employer.
Odds are very strong that it will be rolled into an IRA that has the same tax treatment as the previous employers retirement plan, John tells EBN.
In a June 401(k) report from the Government Accountability Office, the independent audit agency finds that providers who offer options to 401(k) plans are also beginning to provide managed accounts in IRAs to accommodate employees who separate from prior employers. GAO reviewed eight managed account providers that represented about 95% of the industrys defined contribution plan market in 2013.
One of these providers noted that it is easier to engage participants who use managed accounts through products such as IRAs, and there is more flexibility with investment options, even though the providers marketing costs may be higher, the GAO report states.
According to data from the Investment Company Institute, 75% of Roth IRA-owning households participated in those accounts through investment professionals, while 30% gained access through a mutual fund company or discount brokerage. And at the end of 2013, there were $6.5 trillion in total traditional IRA assets and about $505 billion in Roth IRA access.
Unsurprisingly, given the access from major providers, ICI says that about three-quarters of Roth IRA owners approach financial professionals in order to pave a clear path for retirement.
But from the small business perspective, accessing an IRA may be the only benefit available for employees, as it can provide a retirement vehicle to their workforce and help to eliminate any worry associated with income needs.
Small employers can offer IRAs as a retirement plan through the employer certainly large employers dont do that because its more efficient to do a 401(k), Copeland tells EBN. They have more flexibility because there are some rules that had to do with contributions and non-matching contributions that make it better for smaller employers.
John, also the deputy director of the Retirement Security Project at the Brookings Institution, agrees that small employers who are unable to contribute or offer retirement plans to their employees can use the payroll deducted IRA as a benefit to their workforce.
Obviously a 401(k) is likely to be better, John says, but notes that it certainly beats nothing at all.
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