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Stock gains send IRAs soaring

By Jennie L. Phipps · Bankrate.com
Wednesday, July 23, 2014
Posted: 2 pm ET

The average IRA balance rose 10 percent to $89,100 over the past year, according to Fidelity Investments' analysis of 7 million IRA accounts.

The average contributions for tax year 2013 reached $4,150, a record high.

"People are saving because they recognize first and foremost that even if they do have access to a workplace savings plan, contributing to an IRA is a smart step, especially if they don't have a defined benefit pension plan," says Ken Hevert, vice president, Fidelity Investments.

These retirement planning super savers are smart. This week financial services firm Prudential, also an IRA provider, released the sobering numbers in the accompanying chart, which shows that someone who wants to retire at 65 and who didn't get started saving until age 45 will have to put away a daunting 27 percent of income annually, assuming a return of 4 percent after inflation and the purchase of an annuity with the money saved.

Saving rate required to attain 70 percent income replacement rate

Retire at Start saving at:
25 35 45
65 10% 15% 27%
67 7% 12% 20%
70 4% 6% 10%

Source: Center for Retirement Research at Boston College and Prudential

Hevert says that Fidelity is seeing an increasing number of people choosing a Roth IRA rather than a traditional IRA. The difference is when your money is taxed. With a traditional IRA, you put the money aside before taxes, but you owe taxes when you take it out. With a Roth, you use after-tax money to invest. In both traditional and Roth IRAs, interest grows tax free. Each plan has advantages, but Roths can be especially good for older savers, Hevert says, since you can continue to save in a Roth as long as you have earned employment income since there are no required minimum distributions at age 70 1/2. You also can leave a Roth IRA to your heirs free of any tax obligations, though heirs would be required to pay taxes on an inherited traditional IRA.

Eligibility to make Roth IRA contributions is phased out once an individual's income is between $114,000 and $129,000 in 2014 ($181,000 and $191,000 for couples filing jointly), but conversions from traditional to Roth IRAs aren't limited by income. Hevert says that an increasingly popular approach among high earners is to put money in a traditional IRA and immediately convert it. "Taxes are going to be limited. You already paid taxes on the contribution and you've done the conversion within a short time period, so you haven't earned any interest and you haven't put yourself in a position to have capital gains or dividends," he explains.

However, there is a catch to this type of conversion for those with accumulated savings in qualified retirement plans.

Are you a super saver?

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