Use of Tax Incentives for Retirement Saving in 2006

Report
October 14, 2011

This CBO publication examines participation rates in and contributions to various tax-favored retirement plans in 2006, with some earlier data presented for comparison. Two features of the Economic Growth and Tax Relief Reconciliation Act of 2001 also are analyzed: increases in contribution limits and an additional incentive, known as the "saver’s credit," that was created to encourage lower-income taxpayers to save for retirement.

In 2006, just over half (52 percent) of all workers who filed tax returns participated in some form of tax-favored retirement plan. Overall, participation was nearly the same in 1997, 2000, 2003, and 2006—ranging from 50 percent to 52 percent.


 

Participation in 2006 was concentrated in employment-based plans, with 48 percent of all workers either contributing to or being covered by such a plan (47 percent as wage earners and 1 percent as self-employed people). Twenty-nine percent of workers who filed tax returns were wage earners who contributed to 401(k)-type plans. Participants in 401(k)-type plans contributed an average of $4,350 in 2006.

Only 7 percent of workers contributed to IRAs in 2006. Slightly fewer workers contributed to traditional IRAs (3 percent) than to Roth IRAs (4 percent). Contributions to traditional IRAs were larger ($2,840), on average, than contributions to Roth IRAs ($2,590).

Five percent of participants in 401(k)-type plans in 2006 contributed up to the limits established by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). Twelve percent contributed amounts equal to or greater than the pre-EGTRRA limits and presumably would have made the maximum allowable contributions in the absence of EGTRRA. For traditional IRAs, EGTRRA reduced the proportion of participants constrained by the contribution limits in 2006 from 73 percent to 52 percent; for Roth IRAs, the corresponding proportions were 62 percent and 39 percent.

The saver’s credit was introduced by EGTRRA to encourage retirement saving by providing tax credits to qualifying taxpayers whose adjusted gross income falls below particular thresholds. In 2006, 25 percent of all workers who filed tax returns were eligible to take the saver’s credit based on their income and tax liability. Only 20 percent of those eligible actually contributed to a retirement account, and 65 percent of those who contributed claimed the credit. The average amount of the credit was $156.