Early Withdrawal from Retirement Accounts

Barbara A. Butrica, senior research associate at the Urban Institute Program on Retirement Policy, delves into the different types of retirement savings accounts, who owns them, why people withdraw from them prematurely, and what the government is and should be doing to encourage more retirement savings.

There are financial instruments that are designed specifically for retirement savings these include defined benefit pensions and 401k plans that are offered through employers as well as individual retirement accounts or iras which are available to anyone 401ks have become much more common over the past 20 years as employers move away from offering defined benefit

Pensions to offering workers defined contribution plans which include 401ks and because employees tend to roll over their 401k balances into iras when they leave their jobs iras are becoming much more common as well 401ks and iras are similar with regard to some of the tax rules for example contributions to these retirement accounts are usually deductible from

Federal income taxes and the investment returns are usually exempt from taxable income until the money is withdrawn at retirement 401ks and iras people who withdraw from them before age 59 and a half pay a 10 tax penalty in addition to the regular taxes on the amount withdrawn except under some special circumstances there are also roth iras which are different

From traditional iras and they’re actually becoming more common as well and with roth iras contributions are not tax are not tax deductible but the withdrawals are and the investment returns are not taxable if the account has been open for at least five years and the the owner is at least 59 and a half years ownership varies a lot by education race and wealth

See also  Check Your Savings Account Interest Rate

For example people with college degrees non-hispanic whites and wealthier people are much more likely to own iras or 401ks than others and their balances in those retirement accounts tend to be significantly higher than they do for other people now when we look at withdrawals from iras or 401ks the pattern is very different in that people without college degrees

Non-hispanic blacks and hispanics and people with little or no other wealth are much more likely as you might expect much more likely to withdraw from from these accounts so they tend to have lower account balances and they are much more likely to tap into those savings withdrawals are very much related to changing family circumstances for example people who

Lose a job or who experience the onset of poor health who might purchase a new home or have to pay for college tuition these are people who are much more likely to withdraw from an ira or a 401 401k than are people who don’t experience these events we also found that when we aggregated the total amount of dollars withdrawn from 401ks and iras in the united states

Between 2004 and 2005 that we calculated that 12 of those total dollars was associated with job losses another 12 was associated with expenses due to the onset of poor health about eight percent was due to purchases of new homes and another five percent for college expenses so these are our legitimate and compelling reasons why people might need to tap into

See also  How to Send Insurance Claim Approval Alerts on SMS | SMS Automation

Their retirement savings that is we didn’t find that lots of people were buying you know paying for luxury vacations or buying you know high priced gadgets they were paying for some fairly basic needs we also found that about 10 percent of those total dollars withdrawn between 2004 2005 occurred when workers left their jobs to start work with another employer

The government started requiring employers to automatically roll over 401k balances that are greater than a thousand dollars to roll over those balances when employees leave the job unless the employee specifically requested a lump sum payment more recently president obama has proposed that employers who don’t currently offer pension plans to their workers that

These employers automatically enrolled their workers in iras employers would deduct three percent of their workers pay and deposit that money into their iras and workers could choose not to participate if they didn’t want to but they could also if they wanted to participate they could also change the contribution amount i think it’s really important for workers

To avoid unnecessarily dipping into their retirement savings that is their 401ks or their iras having said that we know that there are certain circumstances in which the reasons that they do dip into those savings are legitimate i think that policy makers need to keep that in mind and think about integrated savings policies that take into account and encourage

People to save for their needs during retirement but also to save for needs that arise and many times unexpectedly needs that arise before retirement you

See also  Pay for play: Unionization and Paying College Athletes (audio documentary)

Transcribed from video
Early Withdrawal from Retirement Accounts By Urban Institute