Retirement & Financial Planning Report

While only small percentages of individual retirement account holders take early withdrawals from those savings annually, such withdrawals can have long-term impact on their retirement savings, a report for Congress has said.

The Congressional Research Service said that is happening even though the tax code discourages withdrawals by imposing 10 percent tax penalty for taking withdrawals before age 59 1/2 unless the distribution falls under certain exceptions, such as for some higher education expenses and for reasons related to a natural disaster.

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The report said that estimates of so-called “leakage” vary according to whether only penalized withdrawals are counted but cited GAO findings that in 2013, for example, 12 percent of IRA account holders between ages 25 and 55 took withdrawals and other sources estimating that about half of withdrawals are tax-penalized.

Further, other research has shown that withdrawals are taken even by those approaching the age at which the penalty would no longer apply—by nearly 5 percent of those age 50-54 and nearly 4 percent of those age 55-58. Also, it said, research has shown that the withdrawals increase following an economic decline.

CRS said that options for preserving the value of IRAs could include: allowing loans, in which “individuals can pay back the borrowed amounts—with interest—to their own accounts, which may help preserve retirement savings”; allowing account holders to redeposit any money withdrawn, which typically is now allowed only for reasons related to natural disasters; and increasing the age at which the penalty applies to 62.

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