First, the good news. According to the Employee Benefit Research Institute, we're dumping trillions -- trillions! -- of dollars into Individual Retirement Accounts (IRAs). That's a great indication that many people toiling away in their cubicles will be able to walk free one day.
Now, the not-exactly-bad, but not-exactly-great news. The vast majority of the money flowing into these retirement accounts (and IRA assets amounted to $3.67 trillion in 2005) comes from 401(k) accounts rolled over into IRAs when workers leave their jobs.
Why is this mixed news? Well, it's great that many employees aren't cashing out their retirement accounts when they leave their jobs. Moving the money to an IRA keeps it protected, in a place where it can continue to grow until retirement.
But, the EBRI also discovered a truly dismal statistic -- only 10% of eligible taxpayers contributed to an IRA between 2000 and 2002. With the savings rate plummeting since then, it's hard to imagine that number has improved.
If you're already saving money through a workplace retirement plan, you may think you don't need an IRA. Here are a few reasons to consider adding this powerful retirement tool to your arsenal:
If you're contributing to a 401(k) or similar retirement account, you probably already know that the government can make it worth your while to save those pennies. Add an IRA to your retirement lineup, and you can slash your tax bill even more. You even have a choice as to whether to pay your taxes now or later.
For some people, contributions to a traditional IRA can be deducted from your taxes now, and the taxes paid later. This allows your earnings to grow without taxation, and it can be even more advantageous if you expect your tax rate in retirement to be lower than it is now.
If you'd prefer, you can open a Roth IRA, pay all your taxes upfront, and never send another dime to the IRS from that retirement cache. You already know you have to pay for retirement, so why not make it a little bit easier with this savings perk?
If you haven't yet gotten the memo, traditional pensions have not been faring so well lately. Count yourself lucky if you still have one, but keep an eye on its health. Even if it sticks around until your farewell party at the office, it may not provide as much income as you hope. There's also a lot of hand-wringing over Social Security, which was never meant to replace your income completely in retirement, anyway.
The IRA may be the answer to your sleepless nights. Save a little bit more on your own, and you won't have to worry quite so much about the other legs of your retirement stool. You might do this through a workplace retirement plan like your 401(k). But you'll probably have more control if you put your money in an IRA, which brings us to our next point....
As retirement accounts go, it's hard to beat the flexibility of the Roth IRA. Your original contributions can be withdrawn at any time. You're not required to take any distributions from the account in retirement, unlike many other retirement arrangements. And, compared with the restrictions on tax-deductible IRAs, you can make quite a bit more money and still be eligible to contribute to a Roth IRA.
With all IRAs, you get much more flexibility in your investment options than you do with a workplace account. You're not limited to a handful of mutual funds picked by your plan manager. The investing world's your oyster, giving you the power to put individual stocks (not to mention exchange traded funds, bonds, certificates of deposit, etc.) in your retirement portfolio.
For example, you could boost your retirement portfolio with some stocks that pay you back, those paying significant dividends that can be reinvested year after year. You might take a look at Altria
Flexibility may be what you want, but what you really need is some encouragement to leave your money alone until retirement. Stuffing it in a bank account and promising yourself it will still be there when you turn 65 probably isn't a foolproof plan. IRAs come with, shall we say, reminders that you should leave that money alone -- usually in the form of penalties if you withdraw the money too soon.
The last factor you might want to consider is that with two accounts, one at work and one at home, you may be apt to save more overall and stop fretting about whether you will have enough for retirement. Isn't that a great reason to fall in love with your IRA?
For related Foolishness:
- Why the Roth Rules
- 5 Ways to Idiot-Proof Your IRA
- Put Your IRA on Autopilot
- Apathy, Spending Spree, or IRA?
Pfizer is a Motley Fool Inside Value recommendation, while Merck is a former Income Investor recommendation.