Drawing Too Soon on IRAs
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Americans between the ages of 61 and 70 are withdrawing money from their IRA accounts earlier than necessary. Required Minimum Distributions (RMDs) are enforced starting at age 70 ½, however research completed in May 2013 shows individuals are withdrawing on average over $16,000 before RMDs begin.
The reports were completed by EBRI (Employee Benefit Research Institute), a research organization focused on retirement security data. Why are aging Americans tapping into their retirement savings earlier? Low income is one of the shared traits among those taking early withdrawals. Although there are individuals at higher incomes choosing to use their retirement savings now, their withdrawals were not as high as those in lower income brackets.
There are situations where IRA account holders can enjoy penalty-free withdrawals before retirement. Individuals approaching retirement who are concerned about creditors can rest assured both Traditional and Roth IRAs are exempt from creditors’ claims under North Carolina law. The problem with the current early withdrawal trend is that these distributions are not part of a plan for prudent use of retirement assets. The study found that nearly half of individuals aged 61-70 were prematurely drawing from their retirement savings. Without a plan addressing early distributions, many retirees will not realize the impact of these withdrawals until their full retirement age. Even if an individual qualifies for penalty-free withdrawals, excessive distributions will compromise the longevity of retirement accounts, which may cause trouble for covering healthcare and basic living expenses later on.
The tax advantages and security associated with planned and strategically timed IRA withdrawals are too great to sacrifice, so early distributions should be utilized only as a last resort.
CATEGORIES: Financial Planning, IRAs, Retirement
