Frequently Asked Questions about Individual Retirement Accounts (IRAs)

What are IRAs?
In 1974, the Employee Retirement Income Security Act (ERISA) created Individual Retirement Accounts, or IRAs. Congress initially designed IRAs to have two roles: (1) to give individuals not covered by retirement plans at work a tax-advantaged savings plan, and (2) to play a complementary role to the employer-sponsored retirement system by preserving rollover assets at job change or retirement. Over the past 30 years, this flexibility has helped millions of U.S. households save for retirement through IRAs.

IRA Assets
(billions of dollars)

e=estimated
p=preliminary
Source: ICI and IRS, Statistics of Income Division

How large is the IRA market?
IRAs have been one of the fastest growing components of the U.S. retirement market during the past decade. Totaling $4.2 trillion in assets at year-end 2006, IRA assets represented 26 percent of the $16.4 trillion U.S. retirement market, according to the Investment Company Institute. Assets held in IRAs have increased on average 12 percent per year, from $637 billion in 1990.

How many U.S. households own IRAs?
Millions of Americans use IRAs to save for retirement. An estimated 42.2 million, or 36.9 percent, of U.S. households owned IRAs as of 2006. An estimated 34.8 million households owned traditional IRAs, making it the most common type of IRA. A total of 14.4 million households owned Roth IRAs, and 7.9 million U.S. households owned employer-sponsored IRAs, such as SIMPLE IRAs, SEP IRAs, or SAR-SEP IRAs.

Where do IRA owners invest their money?
At year-end 2006, an estimated 47 percent of IRA assets were held in mutual funds, while the remaining assets were managed by brokerage accounts, banks, and insurance companies. In 1990, mutual funds' share of IRA assets stood at 22 percent.

What role do IRA investments play in the mutual fund industry?
IRA assets held in mutual funds represented about 19 percent of total mutual fund assets at year-end 2006, or $2.0 trillion.

How are IRA mutual fund assets allocated?
At year-end 2006, 53 percent of mutual fund assets in IRAs were invested in domestic equity funds. Money market funds held 10 percent, foreign equity funds represented 14 percent, bond funds held 10 percent, and hybrid funds (which include lifestyle and lifecycle funds) were 14 percent of IRA mutual fund assets.

What are annual IRA contribution limits?
Tax legislation, enacted in 2001, contained several significant provisions designed to encourage greater retirement savings, including gradual increases in annual IRA contribution limits. In 2002 through 2004, the annual contribution limit for both traditional and Roth IRAs was $3,000. The contribution limit increased to $4,000 for tax-years 2005 through 2007. Furthermore, individuals age 50 or older may be eligible to make additional "catch-up" contributions.

Where can I find more information on IRAs and IRA investors?
ICI offers a guide to understanding mutual funds, as part of its Investor Awareness series, that includes information on retirement planning. The ICI Education Foundation participates in an Investing for Success partnership that includes a brochure discussing how IRAs can help investors meet future goals.

ICI also conducts research on U.S. household ownership of IRAs, and tracks assets and other statistical data on the IRA and defined contribution plan retirement markets.

June 2007