Filed under: Retirement, Money Market Funds, 401K, IRA, Saving
By MARK JEWELL
BOSTON — When it comes to retirement planning, most of the focus is placed on 401(k)s. The reality is that individual retirement accounts represent the largest share of America’s savings.
At the end of last year, IRAs had $5.4 trillion in assets compared with $5.1 trillion in 401(k)s and other defined contribution plans. Some 40 percent of U.S. households own at least one type of IRA, which offer tax incentives to save for retirement.
Many of these IRA holders are left to their own devices to manage their accounts. Of course, some investors are take-charge types with the ability to maximize savings without taking on too much risk. But in many other instances, portfolio management is hit-or-miss, with little attention to selecting an appropriate mix of mutual funds or other investments.
“Many individuals are still missing out on the long-term savings benefits of IRAs, simply because they don’t understand what they are and how they work,” says Dan Keady, director of financial planning for TIAA-CREF, a financial services company. In a recent telephone survey of 1,008 adults, his company found that nearly half of the respondents lacked a basic knowledge.
IRAs provide individuals not covered by workplace retirement plans with an opportunity to save on a tax-advantaged basis on their own. The money put into a traditional IRA can be deducted from the accountholder’s taxable income for that year, and the money isn’t taxed until it’s withdrawn at retirement. Also, workers who are leaving jobs can use IRAs to preserve the tax benefits that employer-sponsored plans offer.
Haphazard Management
With so many IRA holders managing accounts on their own, approaches vary widely, often to the detriment of long-term savings.
For example, surveys by the fund industry’s trade organization, the Investment Company Institute, found that low-yielding money-market mutual funds make up a far larger proportion of IRA portfolios than is typically considered appropriate. For example, the ICI found that IRA holders in their 60s had invested nearly 25 percent of their portfolios in low-yielding money funds. That’s four times larger than the average allocation to money funds in 401(k) accounts owned by people in their 60s.
Perhaps even more surprising, IRAs held by people in their 20s had an average 22 percent in money funds.
Among the reasons cited for the unusually high weighting: Money funds are often a default investment for small rollovers into IRAs from other investment accounts, and IRA holders may be more likely than other investors to keep invested savings readily available for conversion to cash.
Most investors use money funds as parking places for cash that’s temporarily kept out of higher-yielding investments. But it’s no way to build retirement savings because money funds have offered returns barely above
From: http://www.dailyfinance.com/2013/04/20/managing-ira-savings/