People Tap IRAs After the Penalty Ends

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Workers are apparently very eager to get their hands on the money in their retirement savings plans.

The evidence is the spike in withdrawals from IRA accounts that occurs soon after people turn 59½, the age at which the IRS’ 10 percent penalty on early withdrawals vanishes and is no longer a deterrent, according to a research study.

Average annual withdrawals from IRA accounts surge by about $1,965 to $3,540 – an 80 percent increase – after people cross the age 59½ threshold, according to the study, which was conducted for NBER’s Retirement Research Center by researchers at Stanford University, the University of Chicago, and the Federal Reserve Bank of Chicago.

Early withdrawals from tax-deferred retirement accounts – IRAs and 401(k)s – usually are not for frivolous reasons. This money tends to be tapped to ease financial hardships, such as unemployment, a disability, or a large, unexpected medical expense. But when older workers withdraw retirement funds – even for important matters – they may be chipping away at their financial security in old age. Withdrawals by high-income workers, on the other hand, will likely have little impact on their security.

The researchers analyzed taxpayer data from the IRS, which requires withdrawals to be reported at tax time. They compared withdrawals by people in the dataset for the two years before they turned 59½ with their withdrawals between 59½ and 60½.

While the penalty was in place, daily withdrawals were largely flat. But soon after people crossed the age 59½ threshold, withdrawals spiked before declining “to a new higher level than that of prior ages,” the researchers found.

To read the study, authored by Gopi Shah Goda, Damon Jones, and Shanthi Ramnath, see “How Do Distributions from Retirement Accounts Respond to Early Withdrawal Penalties? Evidence from Administrative Tax Returns.”

The research reported herein was performed pursuant to a grant from the U.S. Social Security Administration (SSA) funded as part of the Retirement Research Consortium. The opinions and conclusions expressed are solely those of the author(s) and do not represent the opinions or policy of SSA or any agency of the federal government. Neither the United States Government nor any agency thereof, nor any of their employees, makes any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of the contents of this report. Reference herein to any specific commercial product, process or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply endorsement, recommendation or favoring by the United States Government or any agency thereof.


My first reaction to this study’s conclusion is that it’s a bit like saying that people who go to dinner buffets tend to eat more than those who order from the menu.

With the stipulation up front that I haven’t read the study (only this article’s summary of it), it occurs to me that it’s logical that folks who are older (i.e. let’s say 60 and above) might tend to withdraw more money from their IRA accounts, both to pay for necessary expenses (like medical costs, which tend to increase as we age) and discretionary expenses (for example, travel costs), AND that these people prefer, if at all possible, to avoid having to pay the 10% income tax penalty that applies to withdrawals before the age 59 and 1/2.

I recently experienced this situation with a friend of mine who wanted to take her daughter and granddaughter to Disney World. She decided to wait one additional year before taking the trip, in part to keep from being subject to the 10% penalty for early withdrawals from her IRA account.

My friend is not rich by any means (middle class income at best). Did her decision to fund this trip for her family reduce the money in her modest IRA account, and leave her less to spend later in life? Without a doubt.

But that didn’t matter a bit to her. She wanted to take the trip within the next couple of years, before her granddaughter started school, and she needed to take some money from her IRA to make it happen.

Will she need this money later? Maybe she will, and maybe she won’t. But it was her choice, a one-off decision that MAY impact her sometime down the road.

I hope she enjoys her trip. I’m sure it will provide memories that she will treasure until she gets to that age and stage where she can no longer remember it.

By then I’m not sure it will really matter that she took this money from her IRA (and future retirement equity) to help fund the trip, assuming she doesn’t find a way to replace the money (and future earnings) she withdrew.

Janet Brazelton

Agree with Ritch’s take on this 100%. Also, at some point post-retirement, we WANT people to take money out of their retirement vehicles and PAY TAXES. I’m not in favor of using these tax-favored vehicles to pass money on to heirs.

My second reaction was, oh good, tax penalties do delay withdrawals. Good to know for policy planning.

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