Who uses tax-favored retirement savings accounts?
Almost all workers are eligible, but only half take advantage of them.
Participation in tax-favored retirement savings accounts varies dramatically with age (Table 1). In recent years, about one-third of workers under age 30 participated, compared with almost two-thirds of workers ages 45 to 59. By the same token, participation varies with earnings (Table 1). About four in five high-income workers participate, but slightly fewer than one in five low-income workers participate.
In recent years, the participation rate of higher-income workers in 401(k)-type plans was more than twice that of lower-income workers. Among workers who participated, contributions were highly correlated with income. The average contribution in 2006 was $4,352. But workers earning over $160,000 contributed more than twice the mean ($11,004) and those earning $20,000 to $40,000 averaged just $1,288.
Individual Retirement Account Contributions
Participation rates in traditional IRAs increase with income. The relationship between participation and income is less straightforward for Roth IRAs because eligibility is limited to those with adjusted gross incomes under $193,000 (for married workers in 2015).
IRA contribution limits are more restrictive than those for 401(k)s. Partly as a result of these restrictions, average contributions vary less than for 401(k)-type plans. In 2006, the average contribution to an IRA was $2,718. Those with incomes in the $20,000 to $40,000 range contributed an average of $2,587, while those earning more than $160,000 averaged $3,920. As workers approach retirement, the average contribution increases. There is little difference in contribution levels to IRAs for married and unmarried workers.
Among those with traditional IRAs, 52 percent maxed out their contributions in 2006, with a significantly higher proportion of high-income taxpayers hitting the limit. Among those with Roth IRAs, 39 percent contributed the maximum amount—again, with higher-income taxpayers doing so more frequently. This pattern illustrates one reason why proposals to increase the maximum tax-favored IRA contribution would disproportionately benefit the affluent.
Congressional Budget Office. Use of Tax Incentives for Retirement Saving in 2006. “Additional Data.”
Burman, Leonard E., William G. Gale, Matthew Hall, and Peter R. Orszag. 2004. “Distributional Effects of Defined Contribution Plans and Individual Retirement Accounts.” Tax Policy Center Discussion Paper 16. Washington, DC: Urban-Brookings Tax Policy Center.
Congressional Budget Office. 2011. Use of Tax Incentives for Retirement Saving in 2006.Washington, DC: Congressional Budget Office.