While the majority of younger investors have a general understanding of individual retirement accounts (IRAs), many confuse the specific benefits of the most commonly used types of IRAs
, according to new research from T. Rowe Price.
When asked about their familiarity with IRAs, 70 percent of investors between the ages of 21-50 said they are familiar or very familiar. Meanwhile, 79 percent said they have personally contributed to an IRA.
And while most investors seemed to have a general understanding of tax advantages including tax-deferred earnings, tax deductibility and tax-free withdrawals, some do not fully understand which benefits are associated with specific types of IRAs, the study said.
Nearly half (48 percent) of respondents correctly associated tax-deferred growth
potential and the ability to reduce taxable income with tax-deductible contributions with traditional IRAs. However, 21 percent mistakenly linked the ability to withdraw savings without paying taxes after age 59 ½ to traditional IRAs instead of Roth IRAs, according to the survey.
In addition, 51 percent of respondents correctly associated tax-free growth potential with Roth IRAs, while 31 percent understood that Roth IRAs offer tax-free withdrawals after age 59 1/2, the study said.
"It's encouraging that a majority of younger investors are familiar with IRAs, generally understand that the accounts offer tax advantages, and have used IRAs to save for retirement," said Christine Fahlund, senior financial planner with T. Rowe Price. "But it appears that there's more that we can do to teach younger investors about the different types of IRAs so they can make more informed choices.