US households have $3.4 trillion in IRAs

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American households, as of December 2004, had accumulated $3,475.1 billion in tax-deferred Individual Retirement Accounts (IRAs), according to the Federal Reserve Flow of Funds Accounts.

The largest portion of these savings were held as “self-directed accounts”, in which a wide diversity of investment are permissible (according to Equity Trust Company), such as:

• Real Estate (apartments, single-family homes, and duplexes);
• Commercial property, developed or undeveloped land;
• Mortgages or Deeds of Trust;
• Publicly traded stocks, bonds, and mutual funds;
• Private limited partnerships;
• Private stock offerings, private placements;
• Private limited liability companies;
• Secured and unsecured notes;
• Judgments, Structured Settlements;
• Tax Sale Certificates;
• Car Paper;
• Factoring;
• Accounts Receivable;
• Commercial Paper; and
• Equipment Leasing.

The graph shows the distribution of individual retirement accounts, by type of custodian

Growth of IRA Accounts

The crash of 2000-2001

The graph shows how the stock market crash of 2000-2001 effected savers in individual retirement accounts.

Over the four years, 1999 to 2002, investors added $837.2 billion to their IRAs, which, added to the $118 billion in decline in value over the period, means that the market crash cost IRA savers about $955 billion.

The second largest category of custodians holding IRAs were mutual funds, followed by accounts with insurance companies, mostly as variable annuities.

Savings flowing into individual retirement accounts were curtailed after the stock market crash of 2000-2001. As the graph shows, investors shunned mutual funds for three years, but came back in 2003.

Distribution Channels for IRA Accounts

Shift away from mutual funds

Accounts with insurance companies, mostly variable annuities, were popular in 2002, but the most lasting effect of the stock market crash seems to have been the shift away from mutual funds towards self-directed accounts.

Except for IRAs kept with insurance companies, the amounts reported here appear in the Flow of Funds Table F 100 (Households), where the investments are shown by type of asset, rather than by custodian.

The great flexibility in self-directed accounts seems to be the reason for their popularity, along with the poor performance of mutual funds.

With self-directed IRAs, an investor may hold real estate directly, as well as private partnerships, including, presumably, one’s own business.