Early Withdrawals and Required Minimum
Distributions in Retirement Accounts:
Issues for Congress
John J. Topoleski
Analyst in Income Security
January 7, 2011
Congressional Research Service
7-5700
www.crs.gov
R40192
CRS Report for Congress
P
repared for Members and Committees of Congress
Early Withdrawals and Required Minimum Distributions in Retirement Accounts
Summary
In response to the economic downturn, Congress considered providing relief to Americans by
suspending two tax penalties on defined contribution retirement plans and Individual Retirement
Accounts (IRAs). First, Congress considered allowing individuals to make withdrawals from their
retirement accounts without paying a 10% penalty for withdrawals from retirement accounts by
individuals under the age of 59½. Second, Congress considered suspending a requirement that
most individuals aged 70½ and older withdraw a certain percentage of their retirement account
balance each year (known as a Required Minimum Distribution [RMD]). In December 2008, the
House and Senate passed H.R. 7327, which suspends the RMD requirement for calendar year
2009. On December 23, 2008, President George W. Bush signed this bill into law (P.L. 110-458).
For calendar year 2010, RMDs have resumed.
The reasons for these proposals are that (1) the increased economic insecurity among American
households means that households might consider using retirement account funds for current
emergency expenses; and (2) since many individuals have at least a portion of their retirement
accounts invested in the stock market, the decline in the stock market means that many retirement
account balances have seen significant declines. Because the required minimum distribution taken
in any year is a percentage of the account balance at the end of the previous year, many RMDs
taken in 2008 were a larger percentage of the account balance on the date of the withdrawal than
on December 31, 2007.
This report discusses the reasons offered in support of suspending these provisions, as well as the
drawbacks. This report also presents data that estimates the number of households that these
proposals would impact. Borrowing from retirement plans as an alternative to withdrawals is also
discussed. Finally, the report discusses the kinds of proposals offered to either suspend or
eliminate the early withdrawal penalty or the required minimum distribution provision.
This report will be updated as legislative activity warrants.
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Early Withdrawals and Required Minimum Distributions in Retirement Accounts
Contents
Introduction ................................................................................................................................ 1
Early Withdrawal Penalty............................................................................................................ 2
Background .......................................................................................................................... 2
Tax Treatment of Early Withdrawals ..................................................................................... 2
Hardship Withdrawals ........................................................................................................... 3
Borrowing as an Alternative to Hardship Withdrawals........................................................... 4
Policy Issues ......................................................................................................................... 5
Required Minimum Distributions ................................................................................................ 6
Background .......................................................................................................................... 6
Estimates of the RMD........................................................................................................... 9
Policy Issues ....................................................................................................................... 10
Proposals to Eliminate or Suspend the 10% Early Withdrawal Penalty....................................... 11
Proposals to Eliminate, Suspend, or Delay Required Minimum Distribution Requirements........ 12
Figures
Figure 1. S&P 500: December 31, 1998, to December 31, 2010................................................... 7
Tables
Table 1. Ability to Borrow or Make Withdrawals Among Households that Have a Defined
Contribution Plan..................................................................................................................... 2
Table 2. Households that Had a Retirement Plan Loan in 2007 .................................................... 5
Table 3. Required Minimum Distributions in 2007 ...................................................................... 9
Table 4. Required Minimum Distributions by Households Where the Head is Aged 70 or
Older ..................................................................................................................................... 10
Contacts
Author Contact Information ...................................................................................................... 12
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Early Withdrawals and Required Minimum Distributions in Retirement Accounts
Introduction
Congress has been considering providing relief to Americans who have become increasingly
worried about their financial security. Among the options, some have proposed reducing or
eliminating the penalties on certain transactions in tax-advantaged retirement accounts. The
accounts include Individual Retirement Accounts (IRAs) and qualified defined contribution (DC)
plans such as 401(k) plans, 403(b) plans, and 457(b) plans.
Two proposals have been suggested: (1) suspending the penalty tax for withdrawals from IRAs
and DC plans that applies to individuals under the age of 59½; and (2) suspending the penalty tax
for not taking Required Minimum Distributions (RMDs) from these plans, which would primarily
affect individuals aged 70½ and older. Although the proposals may temporarily ease individuals’
financial concerns, there are potential drawbacks to be considered.1 Suspending the penalties
might alter the participant’s behavior away from the congressional intent that these plans provide
for financial security in retirement and not be used for either pre-retirement expenses or as tax-
free asset transfers to heirs. Suspending the penalty for early withdrawals would potentially leave
individuals fewer assets in retirement from which to draw income. Suspending the penalty for
failure to take required distributions would provide an incentive to use retirement accounts as
permanent tax shelters or for intergenerational bequests.2
One of the proposals has been enacted into law. In December 2008, the House and Senate passed
H.R. 7327, which suspends the RMD requirement for calendar year 2009. On December 23,
2008, President George W. Bush signed this bill into law (P.L. 110-458).
Workers benefit from tax-advantaged accounts because they are funded with pre-tax income. The
U.S. Treasury estimates that the amount of the tax deduction in FY2009 received by 401(k) plan
participants is $51 billion and by IRA holders is $12 billion.3 Because the accounts are funded
with pre-tax income, the accounts then have a larger base from which to accumulate investment
returns compared to non-tax advantaged accounts. An additional advantage is that the funds
accumulate tax-free earnings. Income tax is paid on the contributions and accrued investment
earnings when they are withdrawn. To ensure that the accounts provide income during retirement,
individuals with these accounts face penalty taxes for using the accounts for most expenses prior
to the age of 59½ or for failing to take required distributions after the age of 70½.
1 For additional background see CRS Report RL31770, Individual Retirement Accounts and 401(k) Plans: Early
Withdrawals and Required Distributions, by John J. Topoleski.
2 Since less than 1% of estates pay the estate tax, the government would not receive much tax revenue from these plans
if the RMD requirement were eliminated and households transferred the account balances their heirs. See CRS Report
RS20609, Economic Issues Surrounding the Estate and Gift Tax: A Brief Summary, by Jane G. Gravelle.
3 Table 19-1, Analytical Perspectives, Budget of the United States Government Fiscal Year 2009.
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Early Withdrawal Penalty
Background
As the worsening economy increases Americans’ economic insecurity, individuals may view their
retirement accounts as a source of funds to help meet current expenses. Current law discourages
the use of funds for pre-retirement expenses by imposing a penalty for some early withdrawals.
A plan that allows access to retirement account funds to current employees prior to the age of
59½ must do so through either hardship withdrawals or loans. Employers are not required to
allow employees access to their DC retirement accounts before the age of 59½ or prior to
separation from employment, but may provide for the option of making withdrawals or borrowing
from the plan. The conditions for making withdrawals or taking a loan must be included in the
Summary Plan Description.4 Table 1 indicates that 80.1% of households with a DC plan are able
to make withdrawals and 69.8% of households with a DC plan can take loans.5 Table 1 also
indicates that most households in which the head of the household is younger than 60 years old
have access to their retirement accounts either through the ability to make withdrawals or the
ability to borrow. Only 15.1% of households can neither borrow nor make withdrawals.
Table 1. Ability to Borrow or Make Withdrawals Among Households that Have a
Defined Contribution Plan
Can Make
Can Neither
Number of
Can Make
Withdrawals and
Borrow Nor Make
Households
Withdrawals Can
Borrow
Borrow
Withdrawals
34,789,000
27,857,000
24,278,000
22,580,000
5,235,000
100.0%
80.1%
69.8%
65.0%
15.1%
Source: CRS analysis of the 2007 Survey of Consumer Finances.
Note: Data in the table refers to households where the head of the household is younger than 60 years old.
Tax Treatment of Early Withdrawals
Funds that are withdrawn from either traditional IRAs or DC plans must be included in that year’s
gross income. To discourage the use of retirement savings for expenses incurred prior to
retirement an additional 10% tax must be paid on the amount that is included in gross income,
unless the amount is rolled over into another qualified plan or IRA.6 The 10% early withdrawal
penalty does not apply to distributions if they are taken
4 A Summary Plan Description is a plan document required by law that describes how the plan operates. Among other
items, SPDs contain information about eligibility and vesting requirements, plan benefits, and the source of
contributions.
5 Data in this report comes from the 2007 Survey of Consumer Finances (SCF). The SCF is a triennial survey of
household wealth, conducted on behalf of the Board of Governors of the Federal Reserve. The most recent survey was
conducted in 2007.
6 See 26 U.S.C. § 72(t).
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• after the individual has reached the age of 59½ ;
• if the individual is a beneficiary of a deceased IRA owner;
• if the individual is disabled;
• in substantially equal payments over the account holder’s life expectancy;
• after separation from employment after the age of 55;
• for unreimbursed medical expenses in excess of 7.5% of adjusted gross income;
• for medical insurance premiums in the case of unemployment;
• for higher education expenses (from IRAs only);
• to build, buy, or rebuild a first home up to a $10,000 withdrawal limit (from IRAs
only); or
• if the individual is a reservist called to active duty after September 11, 2001.7
Hardship Withdrawals
In order for DC plans to offer hardship withdrawals, IRS regulations must be followed.8
Specifically, distributions prior to the age of 59½ from a DC plan to an individual employed by
the company sponsoring the plan must be on account of hardship, which is defined as an
immediate and heavy financial need of the employee. The following expenses are deemed to be
on account of immediate and heavy financial need:
• certain medical expenses,
• costs related to the purchase of a principal residence,
• tuition and educational expenses,
• payments to prevent eviction or foreclosure on a mortgage,
• burial/funeral expenses, or
• expenses to repair a principal residence.
Individuals must pay income tax on the amount of the hardship withdrawal distribution and,
unless the distribution is for one of the exceptions listed in 26 U.S.C. § 72(t), individuals taking
hardship withdrawals must also pay the 10% penalty tax. Regulations require that an individual
who takes a hardship withdrawal is not permitted to make contributions to the plan for six months
following the withdrawal.9 As a consequence, the account would not receive the employer match.
Automatic employer contributions which are not part of a matching contribution could still be
made.
7 Individuals who were affected by Hurricanes Katrina, Rita, or Wilma in 2005 or the Midwestern floods in 2008 were
able to take penalty-free distributions of up to $100,000 from their retirement plans. See 26 U.S.C. 1400Q.
8 IRS regulations for hardship distributions from 401(k) plans are found in 26 C.F.R. §1.401(k)-1(d)(3). Distributions
from 457(b) can be made to meet an unforeseeable emergency. See 26 C.F.R. § 1.457-6(c).
9 See 26 C.F.R. § 1.401(k)-1(d)(3)(iv)(E)(2).
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Unlike funds in DC plans, funds in IRAs may be withdrawn for any reason, although the amount
of the withdrawal must be included in gross income and is subject to the 10% early withdrawal
penalty unless one of the exceptions in 26 U.S.C. § 72(t) applies.
Relatively few households make hardship withdrawals from their retirement plans, although early
distributions from retirement accounts may be increasing as a result of the worsening economy.
For example, the Vanguard Center for Retirement Research noted that fewer than 2 per 1,000
participants took a hardship withdrawal from their Vanguard 401(k) plan in 2010.10 It is uncertain
to what extent individuals have been increasing early withdrawals from IRAs, which might be
preferred to hardship withdrawals from DC plans because individuals do not have to prove
hardship to make withdrawals from their IRAs.
To help households that are in financial distress, some suggest that Congress temporarily waive
the early withdrawal penalty of 10% to allow easier access to retirement funds. Although the
proposal would help households in financial difficulty, it would run counter to Congress’ stated
intention that these accounts be used to encourage retirement savings. In addition, the account
balances would be irrevocably harmed because (1) the individual does not have to repay the
withdrawn funds to the account, and (2) the individual would lose at least six months of
contributions and any employer match.
Borrowing as an Alternative to Hardship Withdrawals
As indicated in Table 1, households often have the choice between making a hardship withdrawal
or borrowing from the DC plan. Borrowing has several advantages:
• Compared to other kinds of loans, the application process is generally
uncomplicated and involves little paperwork. In addition, credit checks and proof
of financial hardship are not required;
• The loan usually has an interest rate of one or two percentage points above the
prime lending rate. This is most likely cheaper than other sources of credit
available to households;
• The interest payments are credited to the borrower’s account, rather than to the
lending institution. This reduces the cost of the loan to the difference between the
loan interest rate and the return on the plan’s assets; and
• Borrowers can continue contributing to their accounts while making the loan
payment, which prevents a large break in contributions from occurring.
Table 2 indicates that 14.6% of households that could borrow from their retirement plan in 2007
had an outstanding loan. Among households with incomes of $50,000 or less, 19.5% had an
outstanding loan. Among households with incomes from $50,001 to $75,000, 20.1% had a loan.
Households that make more than $75,000 are more likely to have a loan outstanding than
households that make less than $75,000.
10 Available at https://institutional.vanguard.com/VGApp/iip/site/institutional/researchcommentary/article/
InvResExamineLoans.
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Table 2. Households that Had a Retirement Plan Loan in 2007
Number of Households
Number of
Percentage of
that Can Borrow from
Households that Have
Households that Can
Their DC Plan
an Outstanding Loan
Borrow that Have an
Income
(thousands)
(thousands)
Outstanding Loan
Income less than or equal to $50,000
4,737
924
19.5%
Income $50,001 - $75,000
5,455
1,097
20.1%
Income $75,001 - $100,000
4,487
588
13.1%
Income more than $100,000
9,599
934
9.7%
Al Households
24,278
3,543
14.6%
Source: CRS analysis of the 2007 Survey of Consumer Finances.
Notes: Data in the table refers to households where the head of the household is younger than 60 years old.
Percentages indicate percentage within each income group (i.e. 5.2% of households that have an income under
$25,000 and that can borrow have an outstanding loan).
Policy Issues
Suspending the penalty for early withdrawals from retirement plans might help people in
financial need. Some temporary relief might be justified, particularly with the economy in
recession. Individuals might have difficulty making ends meet and might not have ready access to
funds to pay for ordinary expenses. In addition, suspending the penalty might encourage
participation among households that are eligible but who do not currently participate in a DC plan
or have an IRA. Some individuals, particularly those with lower incomes, might decline to
participate out of concern of limited or costly access to the funds in their retirement accounts if
they have emergency expenses. Plans that allow access to their funds may have higher
participation or contribution rates than plans that do not.11
However, the drawbacks of allowing access to retirement savings prior to retirement need to be
considered. First, funds that individuals take from their retirement accounts to pay for current
expenditures will not be available when the individuals retire; this is a concern because most
households rely on a combination of Social Security and withdrawals from their DC plans or
IRAs as income sources in retirement. Second, suspending the penalty on withdrawals would not
help individuals who are not permitted access to their retirement accounts. Finally, Congress has
from time to time added to the exceptions to the early withdrawal penalty. Each exception
increasingly makes the plans appear to be tax-deferred savings accounts, rather than the tax-
deferred retirement accounts—the original intention for the tax code changes establishing these
accounts.
11 See, for example, U.S. General Accounting Office report, GAO/HES-98-5, 401(k) Pension Plans: Loan Provisions
Enhance Participation But May Affect Income Security for Some.
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Required Minimum Distributions
Background
Certain account holders are required to withdraw a percentage of their accounts each year, called
a Required Minimum Distribution (RMD).12 The RMD assures that tax-deferred retirement
accounts that have been established to provide income during retirement are not used as
permanent tax shelters or as vehicles for transmitting wealth to heirs. The RMD for a year is
based on the account balance on December 31 of the prior year and on the life expectancy of the
account holder or over the joint life expectancies of the account holder and his or her designated
beneficiary.13 The distributions from these plans must begin no later than April 1 of the year after
the owner reaches the age of 70½. Participants in employer-sponsored plans who are still working
at the age of 70½ can delay distributions until April 1 of the year after they have retired. This
exception does not apply to traditional IRAs. In traditional IRAs, the required beginning date for
distributions is always April 1 of the year after the participant reaches the age of 70½. Failure to
take the RMD results in a tax penalty equal to 50% of the amount that should have been
distributed. In addition to individuals aged 70½ and older, an individual who inherits an IRA and
who is not the spouse of the deceased account holder must take the RMD based on the inheriting
individual’s life expectancy.14
As noted above, the RMD is based on the account balance on December 31 of the year prior to
taking the distribution. Financial advisors generally suggest holding assets in a retirement account
in a well-diversified portfolio composed of stocks and bonds. They also suggest that the
percentage invested in bonds increase with age. In practice, most households hold a large fraction
of their retirement accounts in equities. Data from the 2007 Survey of Consumer Finances
indicate that households invest about 68% of their IRAs in stocks; among households in which
the head is aged 70 or older the percentage of their IRA assets invested in stocks is 67%. Figure 1
shows the value of the S&P 500 market index from December 31, 1998, through December 31,
2010. In four of these 12 years, the S&P 500 stock market index finished the year lower than
when the year began. In fact, since 1950 the S&P 500 index finished below its starting value in 16
of 59 (27.1%) years. In 2008, the S&P 500 index was 39.4% lower than its value on December
31, 2007. This precipitous stock market drop was the reason for the calls to suspend the RMD
requirement. For many account holders the account balances of their retirement plans were likely
to be lower at any point in 2008 compared with December 31, 2007. Thus, the percentage of the
account that has to be withdrawn is likely to be higher than it would be if the RMD were based on
the value of the account when the RMD is distributed.15
For households whose retirement account balances have lost value because of the decline in the
stock market, suspending the tax for failure to take the RMD would allow these households to
12 See 26 U.S.C. § 401(a)(9).
13 See IRS Publication 590, Individual Retirement Arrangements (IRAs), for details on determining which table in
appropriate for a particular taxpayer.
14 Roth IRAs have no RMD rules.
15 For example, suppose an individual’s account balance was $100,000 on December 31, 2007, and declined to $60,000
on the date that the RMD is taken. If the individual is required to withdraw 10% of the account, then the RMD is
$10,000. However, because of the decline in the account balance, the individual has to withdraw $10,000/$60,000 =
16.7% of their account.
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recoup the losses as the stock market rises faster than if they were required to withdraw the funds.
Although the funds from the RMD do not have to spent, taxes would have to be paid. The funds
could then be invested in similar financial assets in a non-tax advantaged account. However,
because income taxes must be paid on the funds that are withdrawn from the tax-advantaged
account, the non-tax advantaged account would have a smaller base from which to accrue
investment returns. In addition, the investment returns would not accrue tax-free.
Figure 1. S&P 500: December 31, 1998, to December 31, 2010
Source: CRS.
Suspending the RMD penalty tax would benefit households that might prefer to not make
withdrawals from their retirement accounts to preserve their wealth for possible future expenses,
such as long-term care. In addition, wealthier households that have adequate income from sources
other than retirement accounts would benefit because these funds would continue to grow in
accounts where the investment earnings are tax-deferred. Lower-income households that are
drawing down their retirement accounts to pay ordinary expenses would likely not benefit from
the removal of the tax for failure to take the RMD, as they would likely be withdrawing funds
from their retirement accounts regardless of RMD penalty tax. Finally, households that had most
of the their retirement account invested in safe assets, Treasury bonds for example, would likely
not have seen sharp declines in their account balances. Nonetheless, these households would also
benefit from a suspension of the RMD requirement.
Suspending the RMD requirement can be accomplished by Congressional action to alter the tax
code; it could also be accomplished through Department of Treasury regulations. Section
401(a)(9)(A) of the Internal Revenue Code requires that entire account balances be distributed
either (1) not later than the required beginning date, or (2) beginning not later than the required
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beginning date over the life of the individual (or the individual and a designated beneficiary) in
accordance with regulation.16 The life expectancy tables are published in the IRS regulations. The
regulations note that the tables “may be changed by the Commissioner in revenue rulings, notices,
and other guidance published in the Internal Revenue Bulletin.”17 On October 10, 2008, House
Education and Labor Committee Chairman George Miller and Health, Employment, Labor, and
Pensions Subcommittee Chairman Robert Andrews called on Secretary of the Treasury Henry
Paulson to suspend the tax penalty for seniors that do not take the RMD.18 The letter stated:
We believe that you have the legal authority to effectively eliminate this penalty by not
requiring the RMD for 2008. Current law requires minimum distributions over the life of the
retiree. However, the Treasury regulations interpret this as requiring annual distributions. By
taking action, seniors will avoid taking unnecessary losses in their retirement accounts and
avoid the current excise tax. We request that you take this action immediately to help protect
and rebuild the retirement savings of older Americans.
W. Thomas Reeder, benefits tax counsel, Department of Treasury, said that Treasury is looking at
ways to change the RMD rules administratively.19 On December 9, 2008, William Bortz,
associate benefits tax counsel for Treasury’s Office of Tax Policy, said the department is likely to
release information about minimum required distributions soon.20
On December 10, 2008, the House passed H.R. 7327, the Worker, Retiree, and Employer
Recovery Act of 2008, which would suspend the RMD requirement for calendar year 2009. On
December 11, 2008, the Senate passed H.R. 7327. On December 23, 2008, President George W.
Bush signed this bill into law (P.L. 110-458).21 In a letter dated December 17, 2008, to Chairman
Miller, the Department of Treasury indicated that the Treasury Department and the Internal
Revenue Service would not take further action on RMD requirements for calendar year 2008
because of administrative constraints faced by individuals and plan sponsors.
The RMD waiver for 2009 expired on December 31, 2009. Individuals can receive their RMDs at
any time during the year. While legislative proposals are introduced to waive the RMD
requirement for one or more years, providing RMD relief after the beginning of a year could
present administrative difficulties for plan administrators and the Treasury.
16 26 U.S.C. § 401(a)(9)(C) defines the required beginning date as the later of (1) April 1 of the year after reaching age
70½ or (2) the calendar year in which the employee retires. For IRAs, the required beginning date is April 1 of the year
in which the account holder reaches the age of 70½. See 26 C.F.R. §§ 1.401(a)(9)-0 through 1.401(a)(9)-9.
17 See the answer to question 4 in 26 C.F.R. § 1.401(a)(9)-9.
18 The letter is available at http://www.house.gov/apps/list/speech/edlabor_dem/10102008PensionRule.html.
19 Treasury Is Weighing Options for Waiving Minimum Withdrawal Penalty During Crisis, Pension & Benefits Daily,
Bureau of National Affairs, Inc., October 22, 2008, available at http://news.bna.com/pdln/PDLNWB/split_display.adp?
fedfid=10953879&vname=pbdnotallissues&fcn=3&wsn=499910500&fn=10953879&split=0.
20 Treasury Official Talks of Solution to Ease Losses from Minimum Required Distributions, Pension & Benefits Daily,
Bureau of National Affairs, Inc., December 10, 2008, available at, http://news.bna.com/pdln/PDLNWB/
split_display.adp?fedfid=11134188&vname=pbdnotallissues&fn=11134188&jd=A0B7P5G7U1&split=0.
21 After the enactment of P.L. 110-458, the IRS provided guidance to financial institutions on reporting RMDs in IRS
Notice 2009-9.
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Estimates of the RMD
Table 3 contains data from the 2007 Survey of Consumer Finances (SCF), which indicate that in
2007 more than 5 million households had a head of household who was aged 70 or older with
balances in a retirement account that would likely be subject to the RMD. The 5.16 million
households subject to the RMD had total account balances of $855.7 billion.22 The average
account balance was $165,707 and the median account balance was $50,000. Using the table for
single life expectancy on page 89 from IRS publication 590, CRS estimates that $67.2 billion
would have been withdrawn in RMDs from these accounts. The average RMD would have been
$13,026 and the median RMD would have been $4,000.23 The large difference between the mean
and median RMD estimates suggests that while some households have large RMDs, most
households have more modest minimum distributions.
Table 3. Required Minimum Distributions in 2007
Total
Total
Required
Number of
Account
Average
Median
Minimum
Households
Balances
Account
Account
Distribution
Average
Median
Age
(thousands) (millions)
Balance
Balance
(millions)
RMD
RMD
70 - 74
2,054
$533,712
$259,822
$71,000
$34,272
$16,684
$4,459
75 - 79
1,347
$150,626
$111,822
$50,000
$12,503
$9,282
$4,256
80
+
1,763 $171,400 $97,220 $29,000 $20,496 $11,626 $3,431
Total 5,164
$855,738
$165,707
$50,000
$67,271
$13,026
$4,000
Source: CRS analysis of the Survey of Consumer Finances (SCF).
Notes: Dol ar amounts adjusted for inflation to December 2007 using the Consumer Price Index.
Table 4 classifies the RMD data by four household income groups where the head of the
household is aged 70 or older: less than $25,000; from $25,001 to $50,000; from $50,001 to
$75,000; and more than $75,000. Although only 29.2% of households make more than $75,000,
these households receive 73.6% of the RMD. The 54.7% of households that earn $50,000 or less,
take 17.9% of the RMD. This income group would likely be taking the RMD for living expenses
anyway. Most of the benefit of removing the RMD penalty would likely go to the higher-income
households. The amount of income tax that these households would pay ultimately depends on
many factors.
22 The dollar amounts in this paragraph are adjusted for inflation to reflect the value of the accounts at the end of 2007.
23 These numbers compare closely with those found in the Survey of Income Program and Participation, which
indicates that 5.5 million households were headed by persons aged 70 or older with an IRA or 401(k) Account in 2005.
See CRS Report CRS Report RL31770, Individual Retirement Accounts and 401(k) Plans: Early Withdrawals and
Required Distributions, by John J. Topoleski.
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Table 4. Required Minimum Distributions by Households Where the Head
is Aged 70 or Older
Income less than
or equal to
Income
Income
Income more
$25,000
$25,001-$50,000
$50,001-$75,000
than $75,000
Number of Households
954 1,870 832 1,509
(thousands)
Percentage of Households
18.5%
36.2%
16.1%
29.2%
Total Account Balances
$30,494 $103,286 $92,111 $629,849
(millions)
Percentage of Total
3.6% 12.1% 10.8% 73.6%
Account Balances
Average Account Balance
$31,978
$55,241
$110,755
$417.340
Median Account Balance
$16,000
$36,500
95,000
$100,000
Total RMD (millions)
$2,511 $9,504 $8,259 $46,997
Percentage of Total RMD
3.7%
14.1%
12.3%
69.9%
Average RMD
$2,633
$5,083
$9,931
$31,141
Median RMD
$1,358
$3,059
$7,853
$10,135
Source: CRS analysis of the 2007 Survey of Consumer Finances.
Notes: Percentages may not add up to 100% due to rounding.
Policy Issues
Suspending the penalty for failure to take the RMD gives individuals—mostly those older than
70½—the opportunity to recover the losses in their retirement accounts more quickly than if the
funds were withdrawn and placed in a non-taxed advantaged account that held similar or identical
investments. However, given the amount of the typical (median) RMD amount of approximately
$4,000, the benefit to most households would likely be modest. In addition, lower-income
households are not likely to benefit from the suspension of the RMD penalty. Lower-income
households would likely be making withdrawals from their retirement accounts even if the
penalty on the failure to take the RMD were to be suspended.
One option would be to allow households to make the RMD based on their account balance at the
time of the withdrawal, thus ensuring households that their RMD is not “too large” relative to the
account balance at the end of the previous year. However, this could prove costly for plan
administrators to implement. In addition, if permanent, this option would not lead to the full
distribution of the account over the expected lifetime of the account holder, as required by current
law.
Another option would be to raise the age at which required distributions would begin. Assuming
the requirement to fully disburse the account over the expected lifetime of the individual remains
in place, implementing this policy option would merely raise the amount of required distributions,
since the account would still need to be fully dispersed. This would occur over a fewer number of
years.
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Early Withdrawals and Required Minimum Distributions in Retirement Accounts
Some have suggested eliminating the RMD requirement altogether. This would be identical to
providing tax-free conversions from traditional IRAs to Roth IRAs. There would likely be a large
cost to the U.S. Treasury. In 2006, the U.S. Treasury reported $124 billion in taxable IRA
distributions from IRAs.24 In addition, individuals who had previously converted from a
traditional to a Roth IRA might consider eliminating the RMD requirement unfair because they
had previously paid taxes on their conversions.25
Proposals to Eliminate or Suspend the 10% Early
Withdrawal Penalty
Some policy analysts have suggested various proposals to eliminate or suspend the 10% early
withdrawal penalty in certain circumstances. In general, the proposals would add a paragraph to
26 U.S.C. § 72(t) to eliminate the penalty in a particular circumstance. It should be noted that
with each provision added to 26 U.S.C. § 72(t) the accounts increasingly operate more like
general tax-deferred savings accounts and less like tax-deferred retirement accounts.
The proposals include eliminating or suspending the 10% early withdrawal penalty for
• public safety employees who retire before the age of 55;26
• workers who are unemployed;27
• individuals affected by natural disasters;28
• homeowners at risk of having their mortgage foreclosed;29
• individuals who receive a hardship distribution from a retirement plan;30 and
• individuals who have qualified adoption expenses.31
24 See Statistics of Income Tax Stats, Table 1: Individual Income Tax, All Returns: Sources of Income and
Adjustments. Available at http://www.irs.gov/taxstats/indtaxstats/article/0,,id=133414,00.html#_complete.
25 For more information see IRS Publication 590, Individual Retirement Arrangements (IRAs).
26 See, for example, H.R. 721 in the 111th Congress.
27 See, for example, H.R. 656 and H.R. 1311 in the 111th Congress.
28 See, for example, H.R. 1424/P.L. 110-343 in the 110th Congress.
29 See, for example, H.R. 1629 and H.R. 2331 in the 111th Congress and H.R. 5822, H.R. 5776, H.R. 4627, and S. 2201
in the 110th Congress.
30 See, for example, H.R. 7278 in the 110th Congress.
31 See, for example, H.R. 2524 in the 111th Congress.
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Early Withdrawals and Required Minimum Distributions in Retirement Accounts
Proposals to Eliminate, Suspend, or Delay Required
Minimum Distribution Requirements
Policymakers have suggested various proposals to eliminate or suspend the RMD requirements.
These proposals would
• suspend the RMD requirement through 2012;32
• eliminate the RMD requirement;33 or
• raise the required beginning date, which would raise the age at which individuals
must begin taking their RMDs.34
Author Contact Information
John J. Topoleski
Analyst in Income Security
jtopoleski@crs.loc.gov, 7-2290
32 See, for example, H.R. 3903 or H.R. 2021.
33 See, for example, H.R. 396 and S. 1040 in the 110th Congress.
34 See, for example, H.R. 882, H.R. 2331, and H.R. 2637.
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