Are Americans Leaving Money on the Table With Retirement Accounts?

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Americans are making progress with their retirement accounts, but they still have plenty of room for improvement. While 401(k) plans are the most widely used savings vehicle for employees, individual retirement accounts (IRAs) are gaining popularity as fund contributions continue to rise. However, Americans are not taking full advantage of Uncle Sam’s tax benefits.

According to a new analysis from Fidelity Investments, the average IRA contribution for tax year 2013 reached $4,150, up 5.7 percent from the previous tax year and an all-time high. With the help of larger contributions and a soaring stock market, the average balance in IRA accounts climbed 10 percent to $89,100 over the same period. The analysis included more than 7 million IRA accounts.

“Saving more, paying off debt, and spending less were the top three New Year financial resolutions cited in a recent Fidelity study and our IRA analysis indicates that Americans are taking those financial resolutions seriously,” said Ken Hevert, vice president of Fidelity Investments. “The fact that IRA contributions are up across all age groups is a positive indication that many people are indeed committed to saving for retirement by putting at least a portion of what they earn into tax-advantaged vehicles such as an IRA.”

Despite the improvement in contributions, many Americans could be receiving more tax benefits from IRAs. The maximum contribution limit for traditional and Roth IRAs is $5,500 or 100 percent of your employment compensation per year, whichever is less. If you’re age 50 or older, you may contribute an extra $1,000 to either IRA type, known as the “catch-up” contribution. As the chart below shows, the average contribution for both IRA types is significantly under $5,500 across all age groups.

Source: Fidelity Investments

Both IRA types are designed to help you save for retirement, but they have some key differences. A traditional IRA experiences tax-deferred growth, which means you contribute pre-tax dollars and pay ordinary income taxes when you make withdrawals in retirement. Depending on your income and if your spouse is already covered by a retirement plan at work, your contributions may also be tax-deductible. In order to receive the greatest tax deduction possible, you need to contribute the maximum amount.

A Roth IRA grows tax-free, meaning you contribute dollars after Uncle Sam takes his cut, and you won’t pay taxes on withdrawals as long as you take them after you have reach age 59 1/2 and own the account for at least five years. A Roth IRA is generally recommended for younger savers or people who believe their tax responsibilities will be greater at retirement.

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