Employer Accounts Pumping Up IRAs

In a new report, the Investment Company Institute (ICI) says that the most recent available data show that households transferred more than $200 billion from employer-sponsored retirement plans to IRAs in 2004.   In fact, the ICI notes that in 2008, nearly 20 million U.S. households – 52% of all U.S. households owning traditional IRAs – had traditional IRAs that included rollover assets.

In ” The Role of IRAs in U.S. Households’ Saving for Retirement, 2008 ,” the ICI notes that with their most recent rollovers, the vast majority of these households (85%) transferred their entire retirement plan balances into traditional IRAs.

Among households with rollovers in their traditional IRAs, nearly half (43%) only had rollover IRAs (having never made traditional IRA contributions), and, not surprisingly, households with rollover assets in their IRAs tended to have higher IRA balances, compared with IRAs funded purely by individual contributions, according to the report. Median   traditional IRA holdings that include rollovers were $75,000 in 2008, compared with median traditional IRA holdings of $40,000 for balances that did not include rollovers.

The ICI report noted that most U.S. households do not contribute to IRAs.   In fact, in tax-year 2007, only 14% of all U.S. households made contributions to an IRA, and only about one-in-four of those contributing to employer-sponsored IRAs in tax-year 2007, with 17% only contributing to employer-sponsored IRAs.

Few households withdraw money from their IRAs in any given year, and most of those are retirement related, according to the report.   Just over one-in-five (22%) of households still owning traditional IRAs in 2008 reported taking withdrawals from these IRAs in tax-year 2007, and among those, 82% reported someone in the household was retired from their lifetime occupation. Nevertheless, among retired households owning traditional IRAs in 2008, nearly three out of five did not take a withdrawal in tax-year 2007, according to the report.

Moreover, those traditional IRA - owning households who made withdrawals generally took modest-sized amounts, according to the ICI; 29% took less than $2,500 from their IRAs.   And, while some withdrawals in dollar amounts appear large, a median of just 6% of the account balance was typically withdrawn, according to the report.

Twenty-two percent of households owning traditional IRAs and headed by an individual aged 59 to 69 reported withdrawals.   As one might expect, in view of penalties and taxes imposed on this activity (and the imposition of required minimum distributions after age 70 ½ - more on that in a minute), withdrawal activity was highest among households headed by individuals aged 70 or older.   In fact, three-quarters of these traditional IRA-owning households took withdrawals in tax-year 2007.

The ICI reported that among those owning traditional IRAs in 2008:

• 51% - younger than 59, did not take a withdrawal
• 3% - younger than 59, took a withdrawal
• 22% - aged 59 to 69, did not take a withdrawal
• 6% - aged 59 to 69, took a withdrawal
• 5% - aged 70 or older, did not take a withdrawal
• 13% - aged 70 or older, took a withdrawal

RMD Impact

The ICI report notes that withdrawals from traditional IRAs were typically taken to fulfill the imposition of required minimum distributions, or RMDs.   Indeed, nearly two-thirds (64%) of households owning traditional IRAs in 2008 and making withdrawals in tax-year 2007 calculated their withdrawal amount to satisfy this requirement.   Another 18% of traditional IRA-owning households taking withdrawals reported they withdrew lump sums based on needs.

Seven percent reported a scheduled withdrawal amount, either a percentage of the account or a fixed dollar amount.  

Traditional IRA-owning households that took a withdrawal in tax-year 2007 usually consulted an outside source to determine the amount of the withdrawal. Nearly six in 10 consulted a professional financial adviser to determine the amount to withdraw in tax-year 2007, while a third consulted IRS rules or publications.

"The Role of IRAs in U.S. Households' Saving for Retirement, 2008" is online at http://www.ici.org/pdf/fm-v18n1.pdf