How Do People Invest Their IRA Money?

IRAs, or Individual Retirement Accounts (or Arrangements per the IRS), are a crucial part of retirement plans for many Americans.

Depending on your income, you may be able to deduct your annual contributions to a traditional IRA when filing your tax return. This is the original IRA, enabled by the Employee Retirement Income Security Act of 1974 (ERISA).

Alternatively, you may be able to contribute to a so-called “Roth IRA” where you don’t deduct contributions but never have to pay another dime in taxes on withdrawals in retirement. These accounts became available nearly a generation later, in 1998.

Other types of IRA are employer-sponsored, such as SEP IRAs, SAR-SEP IRAs, and SIMPLE IRAs.

If you have one or more IRAs, congrats!

According to the Investment Company Institute (ICI) 2024 factbook that means you’re one of roughly 4 in 10 (42.6 percent to be more precise) of 131.43 million American households (as of the end of 2023) who owned such accounts.

But do you know what to invest those monies in?

The following is what the ICI found IRA owners do.

First, How Important Are IRAs?

The IRS sets annual limits on IRA contributions. In 2024, those are $7000 (with another $1000 catchup limit for people over 50).

Despite this relatively modest amount, the ICI Factbook says, “IRA assets totaled $13.6 trillion at year-end 2023, accounting for 35 percent of US retirement market assets…” 

However, this is likely to be, in large measure, because anyone leaving their employer can roll their 401(k) (or similar) plan funds over to an IRA. Indeed, the ICI reports that 62 percent of traditional IRA holders have indeed rolled over money from other employer-sponsored plans.

Either way, that means that IRAs hold more than one in three retirement-plan dollars in the US.

Traditional vs. Roth by the Numbers

The ICI Factbook shows that the total invested in traditional IRAs is $11.4 trillion. That’s more than eight times the $1.4 trillion total balance in Roth IRAs. 

More than seven in 10 IRA owners (for either flavor of non-employer-sponsored IRAs) own mutual fund shares through their IRA. As for ETF shares, those are owned in 31 percent of traditional IRAs and 35 percent of Roth IRAs.

That difference in ETF ownership may be age-related, as the median age of traditional IRA owners is 62 vs. 51 for Roth IRA owners. That would make sense since mutual funds have been around for a century vs. ETFs’ launch in 1993, a mere 31 years ago.

Another interesting difference is the source of funds in traditional vs. Roth IRAs.

For traditional IRAs, a full 74 percent of accounts hold only money rolled over from other accounts. Another 20 percent are pure contributions, and the remaining six percent have a combination of the two.

For Roth accounts, the picture is quite different, with 77 percent of accounts holding just contributions, 11 percent being converted from traditional IRAs, seven percent purely rolled over money, and the remaining five percent having some combination.

This difference is likely due to the relatively late establishment of Roth 401(k) plans, in 2006 as compared to the traditional 401(k) that was established in 1978. As a result, there are far more traditional than Roth 401(k) accounts from which money could be rolled over.

According to Fidelity, while 80 percent of Fidelity-administered 401(k) plans offer a Roth option, only 14.8 percent of eligible employees contribute to them.

How Do People Invest Their IRA Monies?

Since IRAs, like 401(k) plans, are intended to cover retirement expenses that may not start for decades and may span decades more, it’s unsurprising that the majority of money invested through both plan types skews toward stocks – an asset that has historically delivered far better returns than bonds, and where despite high short-term volatility, over decades their results are far less uncertain.

The ICI divided accounts into four groups: (a) traditional IRAs held by workers in their 30s, (b) Roth IRAs held by the same age group, (c) traditional IRAs held by folks in their 60s, and (d) Roth IRAs held by that older cohort, and compared how they invested their IRA money.

Here’s what they found.

Group (a) has (in total) nearly 60 percent in stocks and stock funds, nearly 24 percent in target-date funds, and single-digit percentages in non-target-date balanced funds, bonds and bond funds, money market funds, and other asset classes.

Group (b) has (again, in total) nearly 66 percent in stocks and stock funds, over 24 percent in target-date funds, and single-digit percentages in non-target-date balanced funds, bonds and bond funds, money market funds, and far less than a single percentage point in other asset classes.

Group (c) invests just about 53 percent in stocks and stock funds, less than nine percent in target-date funds, over 13 percent in non-target-date balanced funds, over 18 percent in bonds and bond funds, less than six percent in money market funds, and again, nearly nothing in other asset classes.

Finally, group (d) invests 69 percent (!) in stocks and stock funds, less than seven percent in target-date funds, over 12 percent in non-target-date balanced funds, over 8 percent in bonds and bond funds, under four percent in money market funds, and once more, nearly nothing in other asset classes.

It seems surprising that Roth owners in their 60s are the most aggressive, with nearly seven in 10 dollars of their IRA invested in equities. However, this may be related to the fact that Roth IRAs will never be taxed, so account owners might prefer to allocate more Roth dollars than traditional account dollars to stocks since those will likely appreciate more by retirement.

Financial Pros’ Thoughts on How IRAs Are Invested

Omar Morillo, Founder & Senior Wealth Advisor, Imperio Wealth Advisors, says, “The ICI data highlights a sensible progression in asset allocation across age groups, reflecting traditional risk tolerance theory. Younger investors, particularly those with Roth IRAs, hold more equities due to their longer investment horizon and the potential for tax-free growth. Conversely, older investors, especially those with traditional IRAs, have more bonds as they near retirement and prioritize income stability. Surprisingly, Roth holders in their 60s still favor stocks heavily, likely due to the tax-free growth potential, showcasing a strategic approach to maximizing post-retirement wealth. 

“For IRA owners, the key takeaway is to align asset allocation with your time horizon and risk tolerance. Younger investors should focus on growth, while those nearing or already in retirement should shift toward safer, income-producing assets like bonds. Another critical step for retirees is investing in guaranteed income sources, such as low-cost annuities, to help ensure financial security throughout retirement. Rebalancing your portfolio regularly and considering tax implications, especially with Roth IRAs, can help preserve wealth while maintaining growth potential.”

Kevin Estes, Founder and Financial Planner, Scaled Finance, LLC, points out, “It’s difficult to assess IRA investments without more context. Older Americans investing Roth IRAs more aggressively isn’t by itself concerning. Owners may have saved elsewhere or converted funds from traditional to Roth. It may make sense for someone with both a traditional and a Roth account to invest the traditional one more conservatively and the Roth more aggressively. 

“Younger investors sometimes access retirement funds well before retirement. There are exceptions to the 10% penalty for withdrawals before age 59.5 like financial hardship, higher education, and a first home purchase. Roth IRA contributions can be withdrawn tax-free, and conversions may be accessed after five years. However, withdrawing against the growth could be taxed and penalized.

“Roth IRAs and 401(k) accounts avoid required minimum distributions (RMDs) late in life. These withdrawals are both a hassle and taxed. Roth accounts may also reduce estate tax and avoid passing taxable income to heirs. Affluent individuals who’ll only spend part of their wealth likely skew the averages. 

“I often see portfolios where each account is diversified. That’s a mistake! Differing laws encourage investment specialization. A portfolio is like a symphony. Each account may only have one investment – much like each musician only plays one instrument at a time. The investor is the conductor. A portfolio’s target allocation is the score. Each account plays its part. Together, the parts achieve harmony through diversification.”

How My IRAs Are Invested

First, I need to note that I tend to be a relatively aggressive investor. 

Second, the following is how I allocate my IRA money, which is separate from my 401(k) money (though that too, is invested a little more aggressively than average for my age).

My IRAs are invested almost 79 percent in stock funds, a little over seven percent in bond funds, eight percent and change in “other” assets, and the remainder in cash equivalents.

If I drill deeper, separating my traditional and Roth IRAs, I have over 86 percent of my traditional IRA money in equity funds and under 14 percent in bond funds.

My Roth IRA used to be invested similarly.

However, a few months ago I decided that in my financial situation, it makes sense to invest a few percent of my net worth in Bitcoin (BTC). This was made much easier once the US Securities and Exchange Commission (SEC) approved spot BTC ETFs that can be accessed through my IRAs.

That’s when I decided to dollar-cost-average into one of these BTC ETFs.

If BTC goes to zero (something I doubt will happen, given how many major Wall Street players entered that market), I will have lost my Roth IRA, which would be unfortunate but not devastating. That’s because it is a fraction of my IRA balance and an even smaller fraction of my overall retirement portfolio.

If BTC continues to go up far more gradually than it has historically, I may have similar results to those of my traditional IRAs.

However, should BTC come anywhere close to the targets bandied about by, e.g., billionaire entrepreneur and business executive Michael Saylor, who predicted BTC would reach $13 million per coin by 2045 (BTC trades for about $66,000 per coin as of this writing, so that would be nearly 200x growth for an annualized return of more than 28 percent), I will be sitting on a huge pile of tax-free cash.

Nothing anywhere like Peter Thiel’s legendary $5 billion Roth IRA, but more than enough for me.

I’m not counting on such a 200x increase, but even a 10x or 5x increase would be nice, and as mentioned above, I’m not counting on even such a modest (relative to Saylor’s prediction) move. I just see it as a lopsidedly large upside potential vs. an acceptable downside risk.

The Bottom Line

If you own one or more IRAs, you’re already ahead of most American workers, so kudos.

If you add to it and/or to your 401(k) plan every year, even better.

However, it’s important to invest that money wisely. That starts with having a financial plan that takes into account your full financial picture, your long-term goals and desires, and your level of comfort with risk.

The above is an informative look at how IRAs are invested overall, broken down by both IRA type and age group, plus my own allocations, that can get you started thinking about your preferred allocation.

However you choose to invest, do your due diligence before making significant moves.

Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.