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IRA Insights: Take it to the limit ... one more time

March 28, 2014

Nearly four out of every ten U.S. households own an IRA, holding more than $5.7 trillion in these accounts, according to a 2013 study by the Investment Company Institute. Because of the significant role they play in retirement savings, researchers from Vanguard's Investment Strategy Group set out to understand Vanguard investors' behavior when it came to IRAs. Are they saving effectively? Investing prudently for their futures?

Our researchers are sharing their findings in a new series called IRA Insights. The latest installment appears below, or you can download a copy.PDF


More than half of Vanguard investors who contribute to an IRA save the maximum amount allowable. Even investors as young as age 25 contribute at about this level, and the percentage generally rises with age. The slight dip at age 50 seems to indicate that contributors are not taking full advantage of the catch-up provision the year they become eligible. However, contributions do trend upward again as investors near retirement.

Percentage of Vanguard contributors saving the maximum allowed (2012 tax year):

More than half of Vanguard investors contributing to an IRA save the max amount allowable

Source: Vanguard.

Catch-up contributions have caught on with many investors. Investors age 50 and older have the opportunity to contribute an extra $1,000 annually. The majority of eligible investors are taking advantage of this provision. However, investors age 55-plus are more likely to make a catch-up contribution than those age 50—the first year of eligibility. Some investors newly eligible for the catch-up might not realize that they have a higher limit.

Percentage of Vanguard contributors saving the maximum allowed with and without the catch-up amount (2012 tax year):

Catch-up contributions have caught on

Source: Vanguard.

Historical data suggest that some investors miss contribution increases. The contribution limit last increased in 2008, and many investors failed to take advantage of the additional contribution opportunity. For the 2013 tax year, the contribution limit has increased to $5,500 ($6,500 for investors 50 and over). Investors have until April 15, 2014, to make contributions for the 2013 tax year.

Percentage of Vanguard contributors saving the maximum allowed with and without the 2008 increase:

Some investors miss contribution increases

Source: Vanguard.

Over time, the benefits of taking your contribution to the limit can add up. Even a one-time additional $1,500 contribution can make a difference. A 50-year old investor who takes advantage of the 2013 $1,000 catch-up and $500 increased maximum contribution limit could see that more than triple in value in 30 years.

An extra $1,500 contributed at age 50 can more than triple in 30 years:

An extra $1,500 contributed at age 50 can more than triple in 30 years

Note: Amounts are in today's dollars and assume a 4% rate of return after inflation.

Source: Vanguard

Notes:

  • All investing is subject to risk, including the possible loss of the money you invest.
  • Diversification does not ensure a profit or protect against a loss.
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