Individuals are missing out on the potential tax and savings benefits of an Individual Retirement Account largely because they do not fully understand how the investments work according to TIAA-CREF.
In an annual survey, 80% of respondents said they were not contributing to an IRA, which marks a four-percent increase from last year. Additionally, close to half misunderstood the basics of investing in an IRA and how the money could be used, the study said.
Many individuals are still missing out on the long-term savings benefits of IRAs, simply because they dont understand what they are and how they work, TIAA-CREFs director of financial planning, Dan Keady, said. By allowing savings to grow on a tax-deferred basis, an IRA can help give your current retirement savings a boost no matter what stage of life youre in. Even if youre on a tight budget or just starting to save, if you start small and invest wisely, that amount should grow over time.
For those looking to put money into an IRA, there are several options available which vary based on when and how the investment is taxed. In many cases, they can be beneficial vehicles for saving for retirement or creating a backup plan for college savings, Keady said.
Its also a great planning technique for Plan B, he explained. A lot of times, people havent thought about the overall benefits of an IRA.
Almost two-thirds of respondents were not aware of the maximum contribution amounts, for example, which are $5,500 and $6,500 for individuals age 50 or older.
Younger generations were the most uncertain about IRA investments, according to TIAA-CREF. Although 67% of Generation Y respondents said that they would consider opening an IRA, half of those who did not have one said that the reason was because they didnt know enough.
It really points to the fact that theres a lot of folks out there interested in learning more about IRAs, Keady said. Thats huge because despite the low participation and awareness is, the respondents were open to the potential benefits.
Another reason for the high lack of participation had more to do with the economy, according to the survey. Forty-two percent of respondents who were not contributing said that they did not have room to save above what they were currently setting side.