Investing in an individual retirement account (IRA) is a great way to save for retirement -- as long as you're actually investing your money.

Yet a surprisingly high number of investors who take the critical step of contributing money to an IRA miss out on the account's biggest perk: access to wealth-growing assets like stocks, mutual funds, ETFs and other assets.

What are they doing with their money instead? Nothing. Literally. Instead of investing contributions to grow their retirement savings -- the fundamental purpose of using an IRA to save -- they're letting it sit dormant in cash. And not just for a few months, either.

The high cost of ignoring your IRA

Vanguard, one of the largest retirement account providers, found that more than half of the 279,000 IRAs that customers funded directly remained uninvested for at least one year.

Going back to 2015, it found that nearly one-third of savers who did an IRA rollover (moving money to Vanguard from an old workplace plan or an account at a different financial institution) still had their funds in cash seven years later. In other words, these savers did not make a single investment in their retirement account from 2015 to the end of 2022.

According to Vanguard's calculations, this oversight costs the average investor under the age of 55 at least $130,000 in additional retirement wealth (the difference between investing in a target-date mutual fund versus remaining in cash). That's enough to cover more than two years of retirement expenses for the average American household.

It gets worse: Many retirement savers don't even realize they're making this mistake.

Why IRA investors stick with cash

It's not fear of stock market turbulence or an intentional asset management strategy driving investors to hoard cash in their IRAs. It's user error -- or, more charitably, a misconception about the way IRAs work.

When Vanguard surveyed rollover investors whose assets were still in cash more than a year later, the majority of them said it was completely unintentional. Nearly half (48 percent) assumed their IRA contributions were automatically invested; 68 percent said they didn't realize how their assets were invested and one-third of those surveyed said they preferred a cash-like investment. (Respondents could report more than one reason for being in cash.)

IRA PSA time

An IRA is not an investment in and of itself. It's merely a special type of savings account -- a tax-protected holding cell for your money -- that allows you to buy into a range of investments (stocks, bonds, mutual funds, etc.), if you so choose.

You might think that it's new-to-investing savers that don't understand the mechanics of IRAs. But Vanguard found that even more knowledgeable investors mistakenly believed their contributions were automatically invested.

That's a reasonable assumption if your retirement investing experience comes from saving in a workplace plan like a 401(k). Many workplace retirement plans automatically direct contributions into a qualified default investment alternative (QDIA), typically a target-date mutual fund based on the participant's age that includes exposure to stocks and bonds.

Plan participants are free to choose a different investment option within their 401(k). But even if they opt not to -- or don't know that they can -- at least their money is actually invested in an age-appropriate mix of investments.

IRAs also have a default investment option: It's cash. And at almost any age, a retirement portfolio concentrated 100 percent in cash is not an appropriate asset allocation.

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How to avoid IRA investing inertia

Retirement accounts are designed to be portable, making it easy to take the money you saved in a 401(k) with you when you leave your job and retain the same tax protections by rolling it into a similar account.

Related: Best places to roll over your 401(k)

There are two ways to transfer money from one provider to a new one:

Do a direct transfer (or cash transfer): This is the easiest and most common option for rollovers. Here's the catch: In order to make the transfer, your account needs to be liquidated -- all the investments sold -- and turned into cash.

Until you tell your new financial provider otherwise, your uninvested cash will sit idle or be moved into an affiliated bank account (a "cash sweep account") earning a nominal amount in interest. This default "investment" applies to whether you fund an IRA directly or through a rollover.

Do an in-kind transfer: This option allows you to port over the actual investments (stocks, ETFs and maybe mutual funds). A few catches (and why it's not typically the go-to for IRA rollovers): Not all brokers offer in-kind transfers and some charge a fee (either flat-rate or a percentage of assets transferred).

Even if a broker offers free in-kind transfers, a large portion of your IRA may still end up in cash if the exact or similar investment is unavailable from the new provider, as is the case with many types of mutual funds. In that instance, the old investment will be sold and the cash transferred into the rollover IRA.

If the idea of choosing investments on your own is too daunting, a robo-advisor -- an automated portfolio management service -- can do the heavy lifting for you for a fee. (See our picks for best robo-advisors for IRAs.)

Bottom line

Keeping some of your retirement savings in cash isn't in and of itself a mistake, as long as it's part of an intentional investment strategy. Remember to occasionally peek under the hood of your IRA -- or have a financial advisor perform a portfolio checkup -- to identify any misalignments that might hurt your long-term returns.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.