IRA Withdrawals Usually not Until Later

January 28, 2008 ( - Those with individual retirement accounts (IRA) tend to keep that money where it is for potential use later on in their retirements, according to a new Investment Company Institute (ICI) study.

ICI found that less than one-fifth of households with IRAs pulled money out in tax year 2006 – typically averaging about 6% of the balance. Seven in 10 of those surveyed said “it is unlikely they will take withdrawals prior to age 70 1/2,” according to the study.

Sarah Holden, the ICI’s senior director for retirement and investor research, said the result is affected by the IRA early withdrawal penalty. Savers who withdraw funds before age 59 1/2 are subject to a 10% penalty. Savers older than 59 1/2 but younger than 70 1/2 may take withdrawals without penalty, but once they reach 70 1/2, the law calls for “required minimum distributions” based on IRS tables.

“In this survey, among those making withdrawals, the most cited reason was the required minimum distribution,” Holden told the Associated Press for a news report. “They want to keep it in the market and have it appreciate, with the earnings accruing tax-deferred. They appreciate that feature of the IRA.”

She said older Americans also see their IRA balances as “money for emergencies.”

The latest ICI study found that 40% of all U.S. households, or 46 million, have money in IRAs with assets totaling $4.6 trillion in mid-2007. According to the study,37.7 million households have traditional IRAs, 9.2 million have company-sponsored IRAs like SIMPLE IRAs, and 17.3 million have Roth IRAs.

The ICI study indicated that the greatest growth has come from assets rolled over into IRAs from employer-sponsored accounts like 401(k)s (See Plan Rollovers Fueling Powerful IRA Growth ). In tax year 2006, just 14% of U.S. households made contributions directly to IRAs.

According to Holden, the lower contribution levels may reflect the complexity of rules governing who is eligible for a tax deduction on IRA contributions. At the same time, employer-sponsored 401(k)s and other retirement accounts have become increasingly popular and allow higher contributions, she added.

The survey is here .