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Individual Retirement Account Ownership: Data and Policy Issues

CRS report via LC – Individual Retirement Account (IRA) Ownership: Data and Policy Issues December 9, 2020 (51 pages) “…Congress has provided various tax incentives to encourage individuals to save for retirement. Tax incentives exist for employers to offer retirement plans and for employees to participate in these plans, as well as for individuals to save outside of employer-sponsored plans through Individual Retirement Accounts (IRAs). IRAs—tax-advantaged savings accounts for individuals that are not tied to employers—were first authorized by the Employee Retirement Income Security Act of 1974 (ERISA; P.L. 93-406). ERISA specified that IRAs be available to workers without employer pension coverage. In addition, ERISA permitted individuals with savings in employer plans to roll over these amounts to newly established IRAs, preserving their tax benefits. Contributions to IRAs (now known as traditional IRAs) are deductible from taxable income for certain households, and taxation on contributions and any earnings are deferred until withdrawal. The Roth IRA, introduced in 1997, permits certain households to make non-deductible contributions and receive withdrawals tax-free in retirement. Despite the difference in timing of taxation, traditional and Roth IRAs provide equivalent amounts to spend in retirement under certain assumptions. IRAs are funded by contributions and rollovers. Traditional and Roth IRA contributions are subject to an annual limit:$6,000 ($7,000 for individuals ages 50 and over) in 2020. In 2017, half of individuals who contributed to their traditional IRAs made the maximum contribution, compared to over one-third of individuals who contributed to their Roth IRAs. A rollover occurs when assets are transferred from one retirement plan,such as a 401(k), to another. Rollovers are not subject to the contribution limit. Amounts that are withdrawn from IRAs prior to retirement are generally referred to as leakages and could represent a loss to retirement savings. Leakages can occur when an individual withdraws funds for a specific reason (e.g., higher education or medical expenses) or during the rollover process. Pre-retirement withdrawals (i.e., those taken before age 59½, death, or disability) face a 10% tax penalty unless an exception in Title 26, Section 72(t), of the U.S. Code applies. The optimal strategy for withdrawing IRA and other assets in retirement can be a challenging task for many households. Some households base their strategy on the annual required minimum distributions (RMDs), while others purchase annuities. Nearly all IRA-owning households receive monthly Social Security benefits, likely insulating them from being without income in retirement.This report provides background information on traditional and Roth IRAs, including a legislative history, description of assets in IRAs, and a discussion of IRA tax incentives and retirement savings. The report also analyzes policy issues and options related to IRA ownership, savings accumulation, leakages, and asset draw down by using tabulations from the Internal Revenue Service (IRS) Statistics of Income division and the Investment Company Institute (ICI) data and analysis of the Federal Reserve’s Survey of Consumer Finances (SCF)…”

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