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A Close-up Look at Retirement Distributions

Practice Management
Accumulating the retirement funds that are to be distributed generates great attention, as it should. But what happens when those funds are distributed? A recently released report takes a look at tax returns to learn more about retirement distributions.
 
Decoding Retirement: A Detailed Look at Retirement Distributions Reported on Tax Returns,” a recently released report, concerns research that Peter J. Brady and Steven Bass of the Investment Company Institute conducted as part of the Statistics of Income Joint Research Program. They use data that combine retirement distributions taxpayers reported on tax returns with information those that paid those distributions reported on information returns.
 
Bass and Brady examine retirement distributions looking across all age groups. In order to better understand the income generated by employer plans, IRAs and tax-deferred insurance products, Bass and Brady examined the composition of retirement distributions by the age of the taxpayers who receive them. They also looked at both rollover-type distributions and non-rollover distributions; specifically, IRA distributions and distributions from pensions and annuities, as well as and nontaxable, taxable and penalized distributions.
 
Bass and Brady found that receipt of retirement distributions is widespread and amounts distributed are substantial. Among taxpayers of all ages in 2010, 28% received gross distributions—either directly or through a spouse—and amounted to $1.2 trillion in 2010.
 
But while they found distributions to be widespread, they also found that the frequency with which they occur increases dramatically with age and that older taxpayers receive the bulk of retirement distributions. In 2010, they report, taxpayers age 59 or older received 73% of gross distributions.
 
Rollover-Type Distributions
 
Brady and Bass report that in 2010, rollover-type distributions amounted to $363 billion. Further, they report that taxpayers age 59 or older received 56% of such distributions, and that they were most common among taxpayers age 59 to 69:

 

Group %Taking Rollover-Type Distributions Average Size of Rollover-Type Distributions
Taxpayers younger than age 50               1.9%    $32,000
Taxpayers age 59-69              4.9% $111,000
 
Non-Rollover Distributions
 
Brady and Bass say that in 2010, non-rollover distributions came to $856 billion. They add that the average non-rollover distribution amounts increased with age. The average amount for such distributions among taxpayers who reported such distributions on their 2010 tax returns stood at $8,000 per person for taxpayers younger than age 50 and $20,000 per person for taxpayers age 59 or older.
 
Bass and Brady report that in 2010, 26% of all taxpayers—regardless of age—received non-rollover distributions. But while they report that taxpayers of all ages took them, Bass and Brady found that their frequency increased dramatically with age. In fact, they say that in 2010, 80% of the dollars distributed from retirement plans through non-rollovers went to taxpayers age 59 or older. More specifically:
 
 
Group % Taking Non-Rollover Distributions
All taxpayers                                           26%
Age 59-69                                           59%
Age 70 and older                                            84%
 
A strong majority of taxpayers age 70 or older received their non-rollover distributions from pension and annuity distributions—87%. A majority—57%—received them from IRAs, and 44% of them received non-rollover distributions from both sources.
 
Plan Leakage
 
Bass and Brady also address how to define leakage from retirement plans when using tax data.
 
Brady and Bass consider penalized distributions to be a reasonable approximation for leakage, They report that such distributions comprise about half of the taxable distributions those younger than age 55 receive.
 
Unpenalized taxable distributions received by taxpayers that age, they say, include payments not typically considered to be leakage. These include:
 
  • pension benefits paid to retired military, public safety officers and other government employees;
  • distributions made after an employee or IRA owner dies or becomes disabled;
  • ESOP dividend payments;
  • distributions made pursuant to a divorce settlement; and
  • distributions from annuities purchased by an employer when a DB plan is terminated.