If investors under 50 were tested on their knowledge of IRAs, they might eke out a B, maybe a B+.
They have a general understanding of the tax advantages of IRAs but appear to confuse the specific benefits of traditional and Roth IRAs, according to new research from T. Rowe Price.
Most investors between the ages of 21 and 50 (79%), have personally contributed to an IRA, with a majority (70%) describing themselves as familiar or very familiar with the retirement savings product, according to the research.
The survey found that investors seem to understand that IRAs may come with tax advantages such as tax-deferred earnings, tax deductibility, or tax-free withdrawals. But some do not appear to fully understand which benefits are associated with traditional IRAs and which are associated with Roth IRAs.
For example, almost half (48%) correctly cited tax-deferred growth potential and the ability to reduce taxable income with tax-deductible contributions as features of traditional IRAs. But about one in five incorrectly linked traditional IRAs with the ability to withdraw savings without paying taxes after the age of 59 ½ if the account has been open for at least five years.
IRAs are the only accounts available to investors without access to a workplace retirement plan to save for retirement, T.Rowe Price Senior Financial Planner Christine Fahlund said in a statement. While it’s encouraging that a majority of younger investors are familiar with IRAs and generally understand that the accounts come with tax advantages, “it appears that there’s more that we can do to teach younger investors about the different types of IRAs so they can make informed choices,” she said.
The survey polled 860 adults aged 21 – 50 who have at least one investment account. It was conducted online in December 2011 by Harris Interactive on behalf of T. Rowe Price.