Most IRA Investors Withdraw the Bare Minimum: EBRI

New EBRI research assesses IRA withdrawal rates; IRA guru Ed Slott says taxes are a big driver of keeping withdrawals small

Smaller IRA withdrawals may mean lower taxes. Smaller IRA withdrawals may mean lower taxes.

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IRA guru Ed Slott says that a recent study confirming that most people who are subject to required minimum IRA distributions after age 70 ½ are taking them, and not much more, fails to underscore the two reasons why that is: fear of running out of money and taxes.

The recently released survey, “IRA Withdrawals: How Much and When?” by the Employee Benefit Research Institute in Washington found that in the EBRI IRA Database, just under 21% of traditional and Roth IRA accounts had a withdrawal in 2012.

However, EBRI says that the overall IRA withdrawal percentage was largely driven by activity among traditional IRAs owned by individuals ages 70½ or older, a point at which the individuals are required by federal law to take distributions from these accounts.

For those at or above the required minimum distribution age of 70½, “the withdrawal rates at the median (midpoint) appeared close to the amount that is required to be withdrawn, though some were significantly more,” the study found. “In contrast, among individuals under age 60, 10% or fewer had a withdrawal.”

The EBRI IRA Database, an ongoing project that collects data from multiple IRA plan administrators, for 2012 contains information on 25.3 million accounts owned by 19.9 million unique individuals, with total assets of $2.09 trillion.

In its study, EBRI said that only withdrawals by individuals owning either traditional or Roth IRAs in the database were examined, a total of 17.7 million individuals with $1.97 trillion in assets.

The study found that for those at or above the required minimum distribution age of 70-½, the withdrawal rates at the median appeared close to the amount that is required to be withdrawn, though some were significantly more. In contrast, among individuals under age 60, 10% or fewer had a withdrawal, the study found.

When looking at the distribution of the withdrawal rates for those ages 70 or older, the study says that “the median of the three-year average withdrawal rates also show that most individuals are withdrawing at a rate that is likely to be able to sustain some level of post-retirement income from IRAs throughout their retirement years.”

Furthermore, looking at withdrawal patterns over the 2010–2012 period, the EBRI analysis “suggests that the initial withdrawal rate for those in this age group appears to be at a level that these individuals are likely to continue to take.”

Slott told ThinkAdvisor in an email message that retirees are likely holding back on withdrawing more because “the less they take, the longer it lasts,” but also because required minimum distributions increase taxes as well as income, which “can cause even higher taxes by triggering the loss of tax benefits like exemptions, credits and deductions, which get phased out as income increases.”

For example, Slott says that “the higher your income, the less benefit you get from medical deductions.”

Craig Copeland, EBRI senior research associate and author of the report, noted in a release that the integration of IRA data with data from employment-based defined contribution retirement accounts that is currently underway as part of initiatives associated with EBRI’s Center for Research on Retirement Income “will allow for a better picture of what individuals who may have multiple retirement accounts do as they age through retirement.”

Among other findings in the EBRI analysis:

Just under 21% of all traditional and Roth IRA accounts together had a withdrawal in 2012, including 24.3% of traditional accounts and 3.6% of Roth accounts.

By age, 65.4% of the individuals taking a withdrawal were ages 65 or older, and just over half (51.1%) were age 71 or older, while just 11.5% were younger than age 50. For traditional IRA owners taking a withdrawal, the age distribution followed the overall age distribution, with 67.6% age 65 or older and 53.1% age 71 or older.

In contrast, among Roth IRA owners who took a withdrawal, 44.0% were younger than 50 and only 9.8% were 71 or older. Among Roth owners who took a withdrawal, 35.6% had a balance of less than $10,000.

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