IRA guru Ed Slott says that a recent study confirming that most people who are subject to required minimum IRA distributions after age 70½ 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 percent 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age of 70½, “the withdrawal rates at the median (midpoint) appeared close to the amount that is required to be withdrawn, though some were significantly more,” the study found.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 percent 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minimum distribution age of 70½, the withdrawal rates at the median appeared close to the amount that is required to be withdrawn, though some were significantly more.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 percent 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 our sister site 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.”