A recent study conducted by the University of
Chicago has revealed that workers are taking
out large sums of money from their retirement
accounts soon after the penalty for early
withdrawals is lifted. This trend emphasizes
how retirement funds are not just meant for
retirees but also serve as a lifeline for those
who are still working.
The study found that withdrawals from
traditional individual retirement accounts
(IRAs) increased significantly in the 30 days
after workers turned 59 1/2 - the age when the
early withdrawal penalty expires. The amounts
withdrawn during this period increased three
to three and a half times the baseline level
from the 30 days before the penalty expiration.
After 30 days, the withdrawals declined to
about double the baseline level.
Interestingly, this pattern was consistent even
among those in the highest quartile for income
and IRA balances. It was especially
pronounced for those who turned 59 1/2
during the Great Recession or recently
received unemployment insurance.
These findings shed light on the fact that many
workers require access to their retirement
savings before actually retiring. They also raise
questions about the timing and strictness of
the withdrawal penalty.
Damon Jones, an assistant professor at the
University of Chicago and the author of the
study, noted that people who made
withdrawals received much-needed relief. It is
important for policymakers and financial
institutions to consider the financial challenges
faced by workers and offer them more
flexibility in accessing their retirement funds.
This way, they can better manage their
financial situations, especially during times of
economic uncertainty.
‘A first-month surge’
A recent study conducted by the University of
Chicago examined the withdrawal patterns of
individual retirement accounts (IRAs) by
studying tax records from 1999 through 2013.
The study focused on 12,445 taxpayers born
between 1941 and 1951 who had traditional
IRAs and found that about a third of them had
positive IRA balances the year they turned 57
1/2.
The study discovered that IRAs allow early
withdrawals for any reason, but impose a 10%
tax penalty if the individual is younger than 59
1/2. However, there are some penalty
exceptions for death or permanent disability,
first-time homebuyers, education expenses,
health insurance premiums while unemployed,
and unreimbursed medical expenses.
The baseline withdrawal before the penalty
expiration was $4.93 per day or $1,799 per
year. However, in the short run, one month
prior to the penalty expiration versus one
month after, the average withdrawal increased
by $11.63 per day or $4,245 more a year. In the
long run, three months before versus three
months after the penalty, the average
withdrawal was still $5.14 per day higher than
the baseline. Damon Jones, the author of the
study, commented on this and said, “Once the
penalty was removed, it made it easier to
access funds. More people who made
withdrawals after they were 59 1/2 make the
withdrawals in a first-month surge.”
Interestingly, the study found that during the
Great Recession, those who turned 59 1/2
experienced an even higher first-month surge
in their IRA withdrawals. The short-run IRA
withdrawals during the Great Recession or
after receiving unemployment benefits were four to five times higher than the baseline
withdrawals.
Jones explained, “During the Great Recession,
a lot of people were unemployed. For people
who needed money, it gave them relief. The
penalty was in the way of their getting relief
and they benefited most from earlier access to
liquidity.”
These findings suggest that the penalty for
early withdrawals from IRAs may need to be
reevaluated to provide more flexibility for
workers to access their retirement funds when
they need them the most. It is important for
policymakers to consider these financial
challenges faced by workers and make
necessary adjustments to help them manage
their finances better.
Penalty holidays and legislation could help IRA
participants during emergencies
The Study found that there was a surge in
withdrawals from traditional individual
retirement accounts (IRAs) in the 30 days after
workers turned 59 1/2, when the early
withdrawal penalty expires. This highlights the
fact that many workers need access to their
retirement savings before they actually retire,
and raises questions about the timing and
strictness of the withdrawal penalty.
The study used tax records to analyze IRA
withdrawals made by 12,445 taxpayers born
between 1941 and 1951 from 1999 through
2013. The researchers found that the baseline
withdrawal before the penalty expiration was
$4.93 per day or $1,799 per year. After the
penalty was lifted, the short-run withdrawal
increased by $11.63 per day, or $4,245 more a
year. This shows that once the penalty was
removed, it made it easier for people to access
their funds.
The study also revealed that those who turned
59 1/2 during the Great Recession or recently
received unemployment insurance had a
higher surge in withdrawals. Damon Jones, the
assistant professor at the University of
Chicago and author of the study, pointed out
that during the Great Recession, a lot of people
were unemployed and needed the money for
relief.
The researchers noted that there could be
benefits from penalty holidays, exceptions to
IRA early withdrawal penalties, or early
withdrawal penalty expirations being moved
up a year to 58 ½. The study found that
adjusting the age of IRA withdrawals could
also bring in taxable revenue earlier for the
government. Recent legislation, such as the
CARES Act and SECURE Act 2.0, could also
impact IRA withdrawals and help workers who
are in financial emergencies.
Jones suggested that with a penalty holiday,
the early access to funds could be beneficial for
people in need. All in all, this study
underscores the importance of considering the
financial needs of workers and retirees, and
how retirement savings can serve as a lifeline
for those in difficult financial situations.
Workers have other options for IRA
withdrawals
Withdrawing funds from an IRA may seem like
a quick solution to financial difficulties, but
experts warn that early distributions can have
long-term consequences. According to a recent
study, individuals withdrawing money from
IRAs before the age of 59 ½ are facing high
penalty fees, and researchers suggest that
penalty holidays or the shifting of the
withdrawal age could be a solution to the
problem.
Furthermore, since IRAs are tax-deferred, the
government experiences a delay in tax revenue
collected, and adjusting the age of IRA
withdrawals could allow the government to
collect taxable revenue earlier. Recent
legislation, including the CARES Act, which
allowed workers to withdraw up to $100,000
from their retirement accounts without a 10%
penalty during the pandemic, has also
impacted IRA withdrawals.
Kyle Shores, a financial advisor, noted that
individuals taking early withdrawals often do
so because they lack proper financial advice.
He suggested alternatives to traditional IRA
withdrawals, such as Roth IRAs, which allow
individuals to withdraw their contributions
tax- and penalty-free. However, withdrawing
earnings early from Roth IRAs could result in a
penalty and taxes.
Shores also recommended considering
alternatives like a 72 (t) distribution, which
allows IRA participants to waive the 10% early
withdrawal penalty if they take taxable equal
periodic payments annually for five years.
While some may argue that withdrawing funds
now and saving more later could be a viable
solution, experts warn that it's crucial to
consider the long-term consequences of early
withdrawals. The missed opportunity for
compounding interest in their accounts could
significantly affect an individual's financial
standing in the future. Hence, Shores advises
individuals to seek professional financial
advice and explore alternative options before
making any decisions that could negatively
impact their financial future.
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