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Advisers say that IRAs are a missed opportunity

AARP survey shows just 39% have an account

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By Lisa Shidler

March 24, 2008 6:01 am ET

Individual retirement accounts are misunderstood and not used frequently enough as a retirement savings vehicle, according to a study released by AARP Financial Inc.

The study showed that of those surveyed just 39% owned an IRA and many expressed confusion about a wide range of issues, including eligibility, contribution limits and tax deductibility.

The study, released on March 5, surveyed 1,203 adults age 18 or older by telephone from Jan. 23 to Feb. 10.

Of those surveyed, 71% said they think that IRAs are "worth the bother," but 44% said they didn't understand how the savings plans work. Another 39% said they didn't know whether they were eligible to contribute to an IRA.

'NO MAGIC BULLET'

It was surprising that so few people are taking advantage of this fairly simple way to save for retirement, said Richard "Mac" Hisey, chief investment officer and treasurer of AARP Financial, which is based in Tewksbury, Mass.

"Given how unprepared people are for retirement, you have to take every opportunity you can to get prepared," he said. "That's one of the things we found striking, because this is a way that people can take another small step to get better prepared for retirement. There's no magic bullet."

Mr. Hisey also thinks that because the stock market has fallen, this is an excellent time to contribute before the April 15 tax-filing deadline.

Generally, participation rates are less encouraging for workers under age 50 than those who are older.

Among workers under 50, 32% said they had an IRA, compared with 48% of workers 50 and older. Forty-nine percent of those under 50 said they didn't understand IRAs; 38% of those 50 and older had the same confusion.

The study showed that many Americans are confused about IRA contribution limits. Two-thirds of those surveyed didn't know that Americans 50 and older are eligible to make larger contributions than younger individuals, and three-quarters didn't know that Roth IRA contributions aren't tax-deductible.

Of those surveyed, 40% didn't know they could have an IRA and be enrolled in a 401(k) plan at the same time.

Half those surveyed didn't know that a non-working person could make an IRA contribution if their spouse is employed.

It also helps when consumers set up automatic savings plans for an IRA account, Mr. Hisey said.

In fact, many clients of Kelly Campbell, a certified financial planner with Campbell Wealth Management in Fairfax, Va., set up contributions automatically. His clients include teachers or military personnel, accustomed to regularly depositing money into their accounts.

"When you look at what you can contribute to an IRA compared to a 401(k), it's a small amount and people forget it," said Mr. Campbell, whose firm manages about $200 million.

He pointed out that Americans age 50 and older can contribute $4,000 each, plus a $1,000 catch-up contribution, which means a married couple in their 50s could contribute $10,000 annually.

He said he often has to explain to his clients the difference between a traditional IRA and a Roth IRA. "Half of the time I'm explaining it to people who don't have a clue," Mr. Campbell said.

Automatic contributions are much easier for most clients, agreed Jim Suits, a CFP and president of Summit Capital Advisors in Tacoma, Wash., which has 86 family clients and manages about $35 million in assets.

"We make it very easy and convenient for clients to maximize their IRAs," he said.

Mr. Suits also thinks that he is able to work more closely with clients toward setting up IRA contributions because his firm also handles tax returns. While individuals are getting their taxes done, he talks to them about IRA contributions and sets up automatic contribution systems.

E-mail Lisa Shidler at lshidler@investmentnews.com.

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