In the race to prepare for retirement, investors and fund complexes are missing out on one big opportunity: the Individual Retirement Account (IRA).

Too often, neither investors, nor the financial advisers they turn to, really understand how these savings tools work.

"The biggest opportunity lies in educating people better," said Steven K. Miyao, founder and chief executive of kasina, a research and consulting company in New York.

"Sitting on the sidelines without an IRA, or having an IRA but not fully funding it annually, means you're missing out on one of the best retirement savings opportunities of our time," said John Ragnoni, senior vice president at Fidelity Investments.

The savings accounts can be used for tax-deferred contributions, such as the rollover holdings of an employer-sponsored retirement program when one changes jobs, or, in the case of Roth IRAs, for post-tax contributions that grow and can be withdrawn tax free. Contributory IRAs, which dropped off in popularity after tax reforms in 1986 and still have not recovered, are especially attractive since the Pension Protection Act of 2006 made permanent the $4,000 contribution limit, up from $2,000, and allowed for an additional $1,000 annual "catch up" for those over 50.

While 70% of those interviewed by the Boston-based behemoth said they are concerned about having enough for retirement, only 46% have IRAs. In a survey of 500 IRA owners between the ages of 25 and 64, only 37% said they had contributed for the 2006 tax year as of Dec. 1, while only 16% said they were likely to contribute again before the April 16 deadline.

Of those who did not have IRAs, 52% did not think they were eligible, since they already contributed to a work-sponsored program, while 46% thought that in order to participate, they needed to contribute at least $4,000 to open an account. In fact, many companies have programs like Fidelity's SimpleStart IRA, which allows investors to contribute $200 monthly, and directs those investments to a series of lifecycle funds.

Investors who do not have IRAs or who do not contribute to them miss out on significant tax savings, according to Tom Roseen, senior research analyst at Lipper of New York. "With investors surrendering between 1.6% and 2.4% of their gains to taxes, we could add a great deal of wealth to our coffers by funding IRAs properly," he said.

Because even post-tax contributions grow tax-free in a Roth IRA, an investor who holds a $10,000 investment in his or her account for a decade at an average rate of return of about 8% ends ups with more than $113,000, or $40,000 more than a person who holds the same investment in a taxable account, he said. If that same person were to keep contributing, rather than keep only the $10,000 balance, the disparity in ending balances gets even wider.

IRAs can make a difference for fund companies, too. As of 2005, mutual funds managed 45% of the $3.7 trillion dollar industry, according to data from the Investment Company Institute. Still, that portion could be much bigger.

"People have not been marketing IRAs for a while," said Mary Crosby, IRA marketing manager for Wolters Kluwer Financial Services in St. Cloud, Minn. "Education has dropped off, and people selling retirement plans don't know enough about them to cross sell."

Part of the problem is perception, she said. IRAs were a tool of choice following the 1981 law creating the "Universal IRA," allowing all workers, whether in an employer-sponsored plan or not, to make tax-deductible contributions of the lesser of $2,000 per year or 100% of their gross income to a separate account, and to add to that account unlimited post-tax dollars.

Sales boomed. In 1982, the first year the law was in effect, Americans contributed $28.3 billion to their traditional IRAs, compared to $4.8 billion the year before. Sixty-one percent of those investors who contributed in 1982 did so each year until 1986.

That's when Congress cut back or eliminated IRA deductions for investors with higher incomes and employer retirement plans. In 1987, IRA contributions were $14.1 billion, down from $37.8 billion the year prior, according to ICI data.

Since then, contributory IRAs have struggled to regain their popularity and overcome their reputation as complex products. However, the impending retirement of Baby Boomers has kick-started the rush for rollover IRAs, as these workers, who have, in general, accumulated large 401(k) balances, are attracted to tax-sheltered accounts that allow them to continue investing until age 70-1/2. Rollover accounts took in about $127 billion in new assets in 1999. By 2010, they are expected to see $500 billion in inflows annually, according to Crosby.

Still, sporadic participation and small starting balances typical of contributory IRAs mean that few fund companies are focusing on the younger market, especially workers age 45.

"That's the downside of a the contributory IRA market," said Chip Roame, managing principal at Tiburon Strategic Advisors in Tiburon, Calif. "If you win [an account], you get $4,000. And that's if you win," he said.

More attractive contributory IRA candidates are small business owners that cannot or do not offer a 401(k) plan. Still, that is a very small niche, and one that most companies haven't pursued aggressively, Roame added. However, banks, thrifts and credit unions have, according to research by Wolters Kluwer.

Fund companies that want to keep such competitors from continuing to cut into that market share will have to focus on education, experts said.

For small businesses, that might mean partnering with organizations, such as commerce groups, or advertising in small business magazines, Roame said. To reach investors and advisers, use e-mail or the Internet to clearly explain IRAs' tax benefits and advantages of growth over time, Miyao suggested. "Know who your financial advisers are, and send them information that makes sense for them," he said.

(c) 2007 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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