Most workers participate in the Social Security system, which pays retirement income as early as 62 years old. About half of the U.S. workforce participates in one or both of two kinds of employer-sponsored pensions. The accumulated contributions and investment earnings are then used for participants' retirement income. Individual Retirement Accounts (IRAs) can play an important role by providing workers with tax-advantaged savings accounts in which to accumulate retirement savings. The report concludes with a discussion of some of the policy proposals that some suggest might increase IRA ownership rates among American households. Generally, individuals may rollover account balances from employer-sponsored pension plans into traditional or Roth IRAs upon separation from employment. Since 1986, workers without pension coverage and workers with pension coverage and who have incomes under prescribed limits can make tax-deductible IRA contributions (up to the annual limit) while covered workers who have incomes greater than the prescribed limits may make non-deductible contributions. Tax-deductible IRA Contributions from 1974 to 2007

Less than 3% of taxpayers made tax-deductible IRA contributions in 2007. As a percentage of all tax returns filed, fewer tax returns had IRA deductions in 2006 and 2007 than in any year since 1977. Both the percentage of households that made tax-deductible IRA contributions and the average IRA contribution amount increased with household income. IRA Ownership and Account Balances in 2007

The Survey of Consumer Finances (SCF) indicates that 28.2 million (32.7%) working households owned an IRA in 2007. Most households that had traditional IRAs did not make taxable contributions to their IRAs in 2007. IRAs and Pension Coverage

Although IRAs were authorized to encourage workers without pension coverage to save for retirement, IRA ownership is greater among households with pensions than among households without pensions. Table 4 indicates that 38.7% of households with pension coverage had IRAs in 2007, compared with 25.3% of households without pension coverage. The higher rates of IRA ownership for financial services workers may be a result of greater education level or that these workers are likely to be more knowledgeable about the benefits of IRAs than workers in other industry groups. At least two factors might explain the higher IRA ownership rate for households with incomes greater than $100,000 and without pension coverage: (1) the positive correlation between IRA ownership and income and (2) all of these households were eligible for a tax deduction for their contributions because they did not have pension coverage and were likely in the highest income tax brackets, which means they received larger per-dollar tax benefits for each dollar of IRA contribution compared to lower income households. Contributing to an IRA is a similar decision, as IRA owners forgo current income in exchange for larger income in retirement. Race and Ethnicity

The IRA ownership rate was 32.4% among households without pension coverage in which the head of the household was white, 7.3% among households that did not have pension coverage and in which the head was African-American, and 6.1% among households that did not have pension coverage and in which the head was Hispanic. For example, employer contributions to pension plans are a tax-deductible expense; participants' contributions to defined contribution plans are not included in current taxable income; contributions to traditional IRAs may be tax-deductible; and qualified distributions from Roth IRAs are not taxed. Changing the Retirement Savings Contributions Credit

The Retirement Savings Contributions Credit (the Saver's Credit) is an additional incentive to encourage lower-income households to save for retirement. Under such proposals, employers above a certain size that have been in business a certain number of years and that do not offer a pension plan would be required to establish IRAs for their employees. Some policymakers have expressed concern regarding the fees that financial institutions charge 401(k) plan participants.
Preparing for financial security in retirement continues to be a concern of working Americans and policymakers. Although most Americans participate in the Social Security system, Social Security is likely to be only a part of income in retirement. A recent Gallup poll indicated that while 34% of working Americans expect Social Security to be a major source of retirement income, 45% of those polled expect private retirement savings accounts to be a major source of retirement income.
Since the 1920s, Congress has provided tax incentives to employers to sponsor pension plans for their workers. Recognizing that workers for companies that did not offer pension plans did not benefit from the incentives, in 1974, Congress permitted workers without pension plans to establish Individual Retirement Accounts (IRAs). IRAs are tax-advantaged savings accounts to encourage workers to save for retirement. Since 1974, eligibility for IRAs and the tax treatment of contributions to IRAs have changed. Currently, workers without pensions and workers with pensions whose income is under certain limits may make tax-deductible contributions to IRAs. Other workers may make non-deductible contributions. Since 1998, some workers have been able to make non-deductible contributions to Roth IRAs. Lump-sums from employer-sponsored pensions may be rolled-over into either traditional or Roth IRAs. Most of the funds in IRAs consist of rollover balances rather than the accumulation of contributions and investment earnings.
IRAs may be falling short of their goal of encouraging workers to save for retirement. While about one-half of working Americans participate in employer-sponsored pensions, only about one-third of working households in the United States owned an IRA in 2007. Although IRAs were originally intended for workers in employment without pension plans, IRA ownership rates are higher among households in which the head or spouse participates in a pension plan at work. Among households with pension coverage, 38.7% had an IRA in 2007. Among households without pension coverage, 25.5% had an IRA in 2007.
Analysis of the 2007 Survey of Consumer Finances from the Federal Reserve indicates that households that own IRAs tend to be older, wealthier, more educated, and have higher propensities to save than households that do not own IRAs. Although one-third of working households owned an IRA in 2007, relatively few households made a tax-deductible IRA contribution in 2007. Statistics of Income data from the Internal Revenue Service indicate that 2.3% of tax returns reported a tax-deductible IRA contribution in 2007. The percentage of taxpayers reporting tax-deductible IRA contributions was lower in 2007 than in any year since 1978. Both the percentage of taxpayers reporting tax-deductible IRA contributions in 2007 and the average amount of that contribution increased as taxpayers' reported income increased.
Although IRA ownership rates are lower among households without pension coverage, IRA ownership patterns are similar among households with and without pension coverage. For example, IRA ownership increases as households' income increases and IRA ownership rates are higher among households that own their homes compared with households than do not own their homes. Some policy proposals that supporters argue will increase IRA ownership rates and account balances include making the Retirement Savings Contributions Credit a refundable tax credit, adopting Automatic IRA proposals, increasing household financial literacy, and making the fees that financial institutions charge IRA owners more transparent.