Investors favoring taxable accounts over IRAs, 401(k)s

investmentnews.com:

Money has been pouring into taxable accounts at a faster rate than 401(k)s and IRAs, a reversal of a long trend resulting from wealth being increasingly concentrated among older investors.

The compound annual growth rate in taxable accounts as of the end of 2022 was 6.7% over three years and 8.4% over five years, versus 2.2% and 6.1% among retirement accounts, according to recent data from consumer research firm Hearts & Wallets. Those figures differ from the 10-year compound annual growth rates of 6.9% in taxable and 7.2% in retirement.

“Virtually all of the assets in the U.S. are concentrated in older households,” said Laura Varas, CEO of Hearts & Wallets. “As their assets are growing, they have to be in taxable accounts,” as they have maxed out contributions to individual retirement accounts, 401(k)s and other tax-advantaged options, she noted.

It’s also a result of increasing wealth inequality. There are about two million households with at least $5 million to invest, accounting for a total of $33.4 trillion in assets, while there are more than 110 million households with less than $500,000, representing $8.2 trillion, according to Hearts & Wallets data.

About $51 trillion in assets, or 74% of the total $70 trillion U.S. retail investing market, is held by people 55 or older, the firm reported.

But the taxable accounts story isn’t just reflective of the wealthiest investors. In the era of meme stocks, uncertainty caused by Covid and technological advances, people with smaller asset bases are interested in investing, with a focus on liquidity and emergency savings. Those with $5,000 to $100,000 to invest have 73% of their assets in taxable accounts, close to the 74% seen among investors with more than $10 million.

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