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The Expanding Role of Rollovers

Although traditional IRAs can be opened with either rollovers or contributions, rollovers tend to be the most common source for new traditional IRAs — and account for the vast majority of those IRA openings, according to a new report.

The Investment Company Institute (ICI), in The IRA Investor Profile: Traditional IRA Investors’ Activity, 2007–2013, reports that in 2013:

  • 67% of new traditional IRAs in ICI’s IRA Investor Database were opened with just a rollover;

  • 8.6% were opened with just a contribution; and

  • 2.5% were opened with both a rollover and a contribution.

The remaining new traditional IRAs were transfers from one financial services firm to another. ICI notes that if these transfer accounts are excluded, 85.8% of new traditional IRAs in 2013 were opened exclusively with rollovers.

The impact of workplace savings plan rollovers is most clear among older traditional IRA investors. Among traditional IRA investors aged 70 to 74 with rollovers between 2007 and 2013, the median traditional IRA balance at year-end 2013 was $141,970, compared with $59,790 for those without rollovers — nearly two and a half times as much.

Little wonder that the Labor Department’s fiduciary proposal has focused on IRA rollovers.

Among traditional IRA investors, the median rollover amounts in 2013 were:

  • $3,180 for those aged 25 to 29;

  • $64,610 for those aged 65 to 69; and

  • $58,910 for those aged 70 to 74.

Those aged 50 to 74 accounted for about half of rollovers but nearly four-fifths of the money rolled over in 2013. In fact, traditional IRA investors aged 60 to 64 accounted for nearly a quarter of all rollover money, reflecting their high average rollover amounts as well as the large number of rollovers that came from this age group.

While younger traditional IRA investors were more likely to have rollovers in 2013, rollovers were distributed across all age groups. Indeed, more than half (52.4%) of the rollovers in 2013 were made by investors aged 50 to 74.

And while they may have had smaller balances, younger investors were more likely to have rollovers than other age groups, with 28.7% of traditional IRA investors aged 25 to 29 having rollovers in 2013, compared with 5.3% of traditional IRA investors aged 70 to 74. In fact, the report notes that the only exception to the general pattern of declining rollover incidence as age increases is among investors aged 60 to 64.

For the bulk of younger investors with rollovers, the rollover event opened a new account. Indeed, while that was the case for about 9 out of 10 traditional IRA investors aged 25 to 29 with rollovers in 2013. Still, even among traditional IRA investors aged 70 to 74 with rollovers in 2013, more than 4 in 10 (44.3%) opened new accounts with those rollovers.

Among traditional IRA investors, 10.2% of those aged 60 to 64 had rollovers in 2013, likely due in part to investors in this age group retiring and rolling their retirement accounts into IRAs.