By Dennis Zuehlke, Ascensus
The IRS just gave Americans an opportunity to boost their retirement savings with the first increase in the IRA contribution limit since 2008.
For 2013, the IRA contribution limit is $5,500, up from the current $5,000 limit. Under a provision of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), in 2009 and later years, the $5,000 contribution limit is subject to an adjustment for inflation occurring after 2007 in increments of $500. The catch-up contribution limit, for those individuals age 50 and older, which is not subject to a cost-of-living adjustment, remains unchanged at $1,000.
The IRA contribution limit increase could not come soon enough for retirement savers and IRA providers. Americans’ confidence in their ability to retire comfortably is at historically low levels, with just 14 percent very confident that they will have enough money to live comfortably in retirement, according to the Employee Benefit Research Institute’s (EBRI) 2012 Retirement Confidence Survey. At the same time, while nearly four out of 10 U.S. households owned an IRA in 2011, only 14 percent of households contributed to any type of IRA in 2010, according to the Investment Company Institute.
These two trends, lack of confidence and lack of savings, along with the increase in the IRA contribution limit, present an opportunity for the upcoming IRA season, and savvy credit union marketers and credit union members will not want to look this gift horse in the mouth.
As every good marketer knows, nothing creates interest like change, and the IRA contribution limit increase—the first in five years—will garner lots of headlines in the consumer financial press next year. Credit unions can capitalize on the free press and the increased awareness it generates to market their IRA programs and help their members save for retirement.
Credit unions can target their marketing campaigns to benefit all of their members by focusing on the specific needs of members who are not saving for retirement and those who are saving..
For those members not saving for retirement, credit unions may want to focus on incentives that encourage them to start saving. IRA ownership among those under age 35 is lower than any other age group, and reflects the general trend that IRA ownership increases with age and income. Members under age 35 have a long retirement time horizon, so starting to save for retirement now is critical for this age group. Programs that create awareness and help members start saving for retirement, such as low minimum balance IRA certificates and IRA share accounts, and payroll deduction to encourage regular contributions are key to reaching this demographic.
And while those members not saving now will likely not benefit from the increased IRA contribution limit, many would benefit from the saver’s credit, which provides a tax credit of up to 50 percent of the first $2,000 of contributions made to IRAs and employer-sponsored retirement plans. Unlike a tax deduction, anyone claiming the saver’s credit receives a dollar-for-dollar reduction in their tax bill, yet many are not aware of the tax credit. As with the IRA contribution limit, the income limits to claim the saver’s credit have increased for 2013, enabling more members to claim the credit for making IRA contributions.
Members saving for retirement who are most likely to benefit from the higher IRA contribution limit are those already making the maximum IRA contribution. In tax year 2010, the median contribution among households contributing to Traditional IRAs was $4,500 ($4,000 for Roth IRAs), according to the Investment Company Institute. These members tend to be older and have higher incomes, but they also have a shorter retirement time horizon, so they are looking to maximize their retirement savings contributions. Many are also looking to recoup losses from the 2008 economic downturn that decimated the retirement savings of many older workers.
Programs that encourage members who are saving to maximize their IRA contributions, as well as offer alternative IRA investments, retirement and financial planning assistance, and assistance with retirement plan rollovers will work best for this demographic.
The IRA contribution limit increase is the first major change to IRAs in five years. It will generate a lot of interest in the consumer financial press and questions from members. Credit unions should plan now to capitalize on the heightened interest in IRAs by promoting their IRA program and educating their staff about the changes. Credit unions have a long history of helping members achieve their financial goals, whether saving for a first-time home purchase or college education. The new higher IRA contribution limits present a great opportunity to help members achieve a secure retirement and that’s good for the health of any credit union and its members.