The oldest of the Individual Retirement Accounts, the traditional IRA is a cornerstone of retirement savings in the United States. Originally created in 1974 as part of the Employee Retirement Income Security Act, assets held in IRAs have grown to $3.7 trillion, with 90 percent being in traditional IRAs. Further, one of out of every four retirement dollars is held in an IRA, and if you include defined contribution benefit plans, such as 401k's, that number rises to over 50 percent of all retirement assets.
Traditional IRAs were created for two reasons: the first was to allow workers without a company retirement plan to make tax-advantaged contributions; the second was to provide employees with an investment vehicle they could transfer their company-sponsored plans into when leaving or at retirement.
The typical working American owns two traditional IRAs (median), and the median assets held in those accounts is $24,000. Households with traditional IRAs tend to have greater financial assets but lower incomes than those holding other types of retirement accounts.
Interestingly, in 2005 mutual funds accounted for over 45 percent of IRA assets, up from 22 percent in 1990. The mutual fund industry has clearly benefited from the increase in privately held retirement assets. Over that same time frame, assets held with banks other than mutual funds have dropped from 42 percent in 1990 to 7 percent in 2005. In an effort to maximize retirement funds, investors have moved from interest-bearing, lower-risk banking deposits into higher-risk, higher-return equity mutual funds. In fact, domestic and international equity funds account for 67 percent of all mutual fund assets invested in IRAs.
Newer types of IRAs such as the SIMPLE IRA and Roth IRA have been introduced to provide employees with even greater investment options for funding their retirements. These IRAs are employee-sponsored plans and represent approximately 5 percent of the total amount of IRA assets held in this country.
Almost half of traditional IRA assets are actually rollovers from company-sponsored 401k plans. This provision has become increasingly beneficial as employees change jobs more frequently. Gone are the days where you stayed with the same company and the same benefit plan forever. Flexibility is a must for today's worker.
In 2006, the maximum annual contribution a person may make into their traditional IRA is $4,000 unless you are older than 50 and then it increases to $5,000. The contributions themselves are tax deductible; the withdrawals at retirement are not.