Cracking Open the Nest Egg: IRA Withdrawals and Retirement Finance

Abstract

In this paper we analyze income sources in retirement, particularly the role played by withdrawals from Individual Retirement Accounts. IRAs comprise a relatively small but rapidly growing source of retirement income. Using a cross-section of tax returns from tax year 2002, we find that roughly half of all primary taxpayers aged 70 to 75 had IRA withdrawals that year. This percentage is likely to rise as self-funded and rollover IRAs become even more common. Second, using a ten-year panel of taxpayers aged 57 to 63 in 1987 we find roughly 42 percent of IRA owners first tap their accounts within a two-year window before or after retirement. These on-time tappers make fairly consistent withdrawals after retirement, accounting for about eight percent of income, on average. About 12 percent of IRA owners tap their accounts at least two years prior to retirement. While these early tappers do not seem to deplete their accounts immediately, there is some evidence of account depletion within the ten years following a first withdrawal. Finally, we find that about 45 percent of taxpayers wait to tap their accounts until at least two years after retirement, and often until required to do so by law. These late tappers evidently have sufficient income and assets to finance at least the early years of retirement using non-IRA sources of income. These households are most likely wealthier than the average retiree household, and are maximizing the IRA's tax benefit by keeping assets in the IRA as long as possible.