Happy 20th Birthday, Roth IRA!

by Christle Johnson, QKA, CIP

Happy birthday to a unique retirement savings tool, one that is very different from the others. Since its “birth” 20 years ago, the Roth IRA has come a long way, continuing to grow in dollars and popularity—and its future looks bright.

IRS data shows that Roth IRAs hold over $625 billion, more than 19 million people own Roth IRAs, and 20 laws have made changes and enhancements to the Roth IRA. Further, six states (and one city) in the past two years have enacted laws to implement private-sector retirement savings or marketplace programs that include a Roth IRA component. The intent of these laws is to give more people the opportunity to save for retirement, primarily those who work for small companies that do not offer a retirement plan (e.g., 401(k) plan).

Legacy

Created by the Taxpayer Relief Act of 1997 and first available in 1998, the Roth IRA is a tax-favored retirement savings option unlike the Traditional IRA. Roth IRA contributions are not tax-deductible, but the earnings generated from these contributions are tax-free upon withdrawal if certain requirements are met. What’s more, there are no required minimum distribution (RMD) requirements with a Roth IRA and contributions can be made at any age if based on earned income.

The late Senator William Roth, Jr. (R-Del.), spearheaded the campaign for this type of IRA. Sen. Roth was one of the more prominent advocates of enhanced retirement saving opportunities during his time in Congress. During those times, it was common for Republicans and Democrats to reach across the aisle and work with a legislative co-sponsor from the other major party. Senator Roth was no exception. For his longstanding support of retirement saving initiatives, he was honored with having two types of tax-favored accounts—the Roth IRA and later the Roth 401(k)—named after him.

Latest Trends

The Traditional IRA, which allows for tax-deductible contributions but not tax-free distributions, has been around twice as long as the Roth IRA (43 years). The IRS Statistics of Income statistical tables show trends in taxpayer accumulations in and distributions from IRAs, by year. This data includes IRS estimates-based information taken from completed Forms 5498, IRA Contribution Information, 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., and 1040, U.S. Individual Income Tax Return. The latest available data is for 2015.

Fair Market Values – The longer Traditional IRA history, plus a taxpayer preference to roll over non-Roth employer-sponsored retirement plan assets to a Traditional IRA, has resulted in Traditional IRA balances that are almost 10 times higher than Roth IRA balances. The total accumulated value of assets in IRAs—Traditional, Roth, simplified employee pension (SEP), and savings incentive match plan for employees of small employers (SIMPLE) IRAs—on December 31, 2015, was approximately $7.5 trillion. Accumulated assets at year-end 2015 in Roth IRAs were $625 billion, and in Traditional IRAs $6.4 trillion.

Rollover Contributions – Amounts rolled over to Roth IRAs in 2015 (including both Roth IRA rollover contributions and employer-sponsored retirement plan rollovers) were much lower than to Traditional IRAs. Most rollovers of retirement plan assets were to Traditional IRAs. In 2015, $8.4 billion was rolled over to Roth IRAs and $460 billion was rolled over to Traditional IRAs.

Regular Contributions – More regular (non-rollover) contributions have been made to Roth IRAs than to Traditional IRAs in recent years. In 2015, $21.7 billion in regular contributions were made to Roth IRAs and $17.7 billion to Traditional IRAs.

Catch-up Contributions – Of the 6.3 million taxpayers in 2015 who contributed to a Roth IRA, almost 40% (2.5 million) were age 50 or older, entitling them to make an additional $1,000 in catch-up contributions. But only 1.2 million of them did so. But of these, 85% contributed the maximum $1,000 amount.

Younger Roth IRA Contributors – Roth IRA contributors tend to be younger than Traditional IRA contributors. In 2015, 40% (2.6 million) of Roth IRA contributors were under age 40, compared to only 19% (0.8 million) of Traditional IRA contributors.

Recent Developments

With the current legislative culture at both federal and state levels, legislators continue to promote saving for retirement with both an employer-sponsored retirement plan and IRA, including a Roth IRA.

President Obama in 2014 ordered the first federal government retirement savings program dedicated to Roth IRAs—the myRA® program. It was a voluntary, payroll-deduction Roth IRA program designed to promote retirement savings, aimed at individuals without access to employer-sponsored retirement plans. The response was limited and the Treasury Department announced closure of the program, effective September 2017, with only about 20,000 funded myRAs.

Meanwhile, several states enacted laws creating state-sponsored private-sector retirement programs. These programs generally require certain small employers that don’t offer retirement plan options to implement payroll-deduction IRA programs for their employees. Some of these programs use Roth IRAs as the savings vehicle. And more recently, a bill has been introduced in the U.S. Congress that would re-establish the myRA program for employees who do not have a retirement plan or IRA with accounts that would receive a proposed government-funded match in lieu of the current “saver’s credit.”

With Roth IRA contributions on the rise, and Congress increasingly favoring the Roth concept, this 20-year-old savings program has a bright future.

*As a work of the U.S. federal government, this United States Congress image is in the public domain.