IRAs are great tools, but they're a little unloved

IRAs remain underutilized investment vehicles, despite their many advantages and all the hoopla.

The hoopla rises in intensity this time of year because investing in an Individual Retirement Account is one of the few moves that many people still can take to shave their 2015 tax bill. But even with the potential to put money in by April 18 and apply the deduction retroactively to 2015, most Americans just aren't that interested.

The benefits of IRAs are generally well known. Investment earnings grow tax-deferred, and people contributing to traditional IRAs can deduct what they invest (holders of Roth IRAs don't get this break but can withdraw earnings tax-free in retirement). Yet only 14% of households contributed to an IRA in 2014, according to the Investment Company Institute.

One problem relates to confusion over IRA eligibility or, more specifically, whether you can take a deduction on traditional IRAs. If you're not covered by a 401(k) or other retirement plan at work, you can deduct what you put in — no questions asked. But if you do have workplace retirement coverage, you might not be eligible, based on your income (see Internal Revenue Service Publication 590-A for the numbers).

Another factor working against IRAs is competition from workplace plans. Let's face it: If you only have enough money to contribute to an IRA or a 401(k) account, the latter often is the better bet. Your employer likely will offer matching funds, and  many 401(k) plans can be tapped periodically using low-cost loans — a liquidity feature not available on IRAs.

But if you're still inclined to try a traditional IRA and qualify for a deduction, you have until April 18 this year (in most states) to contribute money and count it for 2015.

Roll over or not? Smart 401(k) moves when you quit your job

Rollovers fatten IRA balances. As noted, few Americans put new investment dollars to work in IRAs these days. Along with those paltry 14% of households making IRA contributions, only 6% of eligible households  made catch-up contributions.  Catch-up contributions allow those 50 and older to invest an extra $1,000 a year beyond the usual $5,500 annual maximum. However, IRAs remain an important piece of the retirement puzzle, with $7.3 trillion in combined assets. The reason? IRAs work well as a vehicle for holding other retirement money. People who leave jobs can retain their assets from workplace 401(k)-style plans, while deferring income taxes, by rolling it into an IRA.

Hey, teens, IRAs are for you, too. Retirement is probably the last thing on the minds of teens, yet people in this age group can get started with IRAs so long as they earn income from a job subject to taxation, including even babysitting and cutting lawns. The amount contributed to an IRA can't exceed the amount that a child earns (up to the IRA maximum of $5,500). But for kids who can afford to contribute and have the desire, starting early can pay huge dividends. "The longer the timeline, the greater the benefit of tax-free earnings," said Fidelity Investments in a commentary expounding on the benefits of Roth IRAs for kids.

Bad times for stocks are good times for Roth IRA conversions

IRA withdrawals won't crash the stock market. Some observers have voiced concern that as Baby Boomers retire in waves, they will pull gobs more money from the stock market, precipitating a crash. They cite required minimum distribution rules for IRAs that kick in after investors turn 70½ — an age range in which the oldest Baby Boomers now find themselves. But even as more investors are forced to pull money from IRAs, this selling pressure probably won't cause stock prices to collapse.

Granted, the $7.3 trillion stashed in IRAs is a lot of money. But it's not all in stocks or stock funds — people in their 60s, for example, have only about half their portfolios in equities, reports the Investment Company Institute. Besides, making an IRA withdrawal doesn't necessarily mean pulling it out of the market permanently, as 37% of IRA holders reinvest their RMD proceeds. Finally, there's no need to empty your IRA the moment you hit 70½, and most people don't.

In short, all those retiring Baby Boomers will affect the stock market, but it's more likely to be felt as a headwind, not a hurricane.

Reach the reporter at russ.wiles@arizonarepublic.com or 602-444-8616.