Savings and Retirement: Who uses tax-favored retirement savings accounts?
Almost all workers are eligible to participate in at least one type of tax-favored retirement savings account, yet only about half do. Older workers and workers with higher incomes are more likely to participate than other workers. Married earners also have higher rates of participation than unmarried earners.
- The likelihood of participation in a tax-favored retirement savings account varies by age. In recent years fewer than one-third of workers under age thirty participated in an account, compared with almost two-thirds of workers aged forty-five to fifty-nine (see table).
- Workers with higher incomes are also more likely to participate in a tax-favored savings account. In recent years, about four out of five high-income workers did so, but only one out of five low-income workers.
- Middle-income workers have higher rates of participation in defined-benefit plans than higher-income workers, who in turn are more likely to participate in defined-contribution plans. In recent years the participation rate of higher-income workers in 401(k)-type plans was over twice that for lower-income workers.
- Participation rates in traditional and Roth Individual Retirement Accounts (IRAs) tend to increase with income. The wealthiest workers, who are ineligible to participate in Roth IRAs, are more likely to participate in traditional IRAs compared to middle-income taxpayers.
- Among those workers participating in a plan, contributions to 401(k)-type plans are highly correlated with income. The average contribution to a 401(k)-type account was $3,700 in 2003, but high-income workers earning over $160,000 contributed an average of about three times that amount ($9,503), while workers earning between $20,000 and $40,000 contributed, on average, just $726.
- IRA contribution limits are more restrictive than those for 401(k)s, and partly as a consequence, average taxpayer contributions vary less with income for IRAs than for 401(k)-type plans. In 2003 the average contribution to an IRA was $2,197. The average contribution varied somewhat by income, with those in the $20,000 to $40,000 range contributing an average of $1,962 and those earning more than $160,000 contributing an average of $2,941. As workers approach retirement, the average contribution increases. There is little difference in contribution levels to IRAs for married and unmarried workers.
- About half of all IRA participants contribute the maximum amount allowed. Among those with traditional IRAs, 55 percent contributed the maximum deductible amount in 2003, and a significantly higher proportion of high-income taxpayers did so than of lower-income taxpayers. Among those with Roth IRAs, 44 percent contributed the maximum amount, with higher-income taxpayers again doing so more frequently. This contribution pattern illustrates one reason why proposals to increase the maximum IRA contribution would benefit wealthy taxpayers more than low- and middle-income taxpayers.