Individual retirement account owners are supposed to withdraw money from their traditional IRA accounts during their retirement years. But are they doing that? Based on new figures out from the Employee Benefit Research Institute (EBRI), they definitely are doing that, especially once they hit required minimum distribution (RMD) age.
Owners of traditional IRAs must begin taking RMDs once they reach age 70.5, or pay a stiff federal penalty if they don’t. (Roth IRA owners are not subject to RMD rules.)
According to the EBRI research, half (50.8 percent) of all IRA withdrawals in 2013 were made by IRA owners ages 71 and up. So the older ages are driving withdrawal activity, and the RMD start time is a likely trigger, or at least a major contributing factor.
What’s more, although some withdrawal amounts were relatively small, others were heavy in the hand. The average withdrawal by older owners came to $45,000 or more during 2013, for instance.
Those numbers suggest that retirement planning practitioners may benefit by offering withdrawal planning services to older clients, right along with other services. If an IRA owner wants to make a large withdrawal but does not need the money for daily living purposes, for instance, repositioning of the assets may be on the front burner, along with discussion about withdrawal strategy in general.
The EBRI study provides insight into the demographics and amounts involved in IRA withdrawal activity. It covers IRA owners of all ages, whether they hold traditional or Roth IRAs or both types. The focus here is on withdrawals from traditional IRAs, since these still comprise the largest part of the IRA market, at least at the older ages.
The withdraw trends
In 2013, just over 22 percent owners of traditional and Roth IRA accounts took a withdrawal from their accounts, EBRI found.
While 50 percent of all withdrawals that year were made by people ages 71 and up, just 12.2 percent were made by the under-50 crowd.
When EBRI looked at just the traditional IRA owners, 25.4 percent made a withdrawal in 2013 across all ages. But the percentage varied substantially by age. Only 7.5 percent of those in their 30s made a withdrawal from a traditional IRA, for instance, while 85.5 percent of those aged 80 and older did the same.
Some account owners took out tidy sums. For instance, the average withdrawal was $45,368 for owners having traditional IRA account balances of $250,000 or more. Given that 25.5 percent of traditional IRAs had balances of $250,000 or more that year, this withdrawal group was of considerable size.
Among all traditional IRAs, however, the average amount taken out was much smaller — $29,687 — for people ages 60-64. It was lower still ($9,227) for the under-30 group and also for the age 80-plus group ($16,111).
In addition to spotlighting the correlation between start of withdrawals and age 70.5 onset of RMDs, the EBRI researchers found that approximately one-fourth of traditional IRA owners aged 71 and older withdrew more than the amount required under RMD rules.
They withdrew 23.9 percent more in 2011, and 26.9 percent more in 2013.
The report does not offer insight into possible reasons for the larger amounts. Did the IRA owners want the additional amounts to meet current income needs? Respond to a shock event? Follow an income plan structured by an advisor? Build a non-qualified financial cushion for the unknown?
The answer could be any and all of those, depending on the client’s situation.
The advisor’s job
The advisor’s job will be to ferret out what lurks beneath the surface of such a decision, and to provide counsel to help the client decide on the best approach.
This could be part of an RMD management service the advisor offers to older clients. This could tie-in with discussions about Qualifying Longevity Annuity Contracts and, for pre-retirees, about when to start withdrawals (if before age 70.5) or make Social Security claim (age 62-70).
Clients with substantial IRA assets would be good candidates, given that their RMDs may represent a noticeable chunk of taxable income. Will a larger than RMD minimum withdrawal be tax-savvy one year but not the next? Does the client want to set it and forget it? How is that going to work in the long term?
Not all older people wait for RMD-day before taking IRA withdrawals. EBRI found that 64.9 percent of those taking withdrawals were ages 65 and up. This suggests withdrawal discussions could easily start well before age 65 or even 60, if the clients are receptive.
The potential market should be big enough to make such a strategy worth considering. Nearly 16 percent of the IRA owners in the EBRI study were age 71 and up, a figure that looks promising when measured against EBRI s sprawling IRA database.
This database includes 25.8 million traditional and Roth accounts owned by 20.6 million unique individuals.
InsuranceNewsNet Editor-at-Large Linda Koco, MBA, specializes in life insurance, annuities and income planning. Linda can be reached at [email protected].
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