GAO Issues Report on IRA and Retirement Plan Early Withdrawals

The United States Government Accountability Office (GAO) has released a March 2019 report, titled Retirement Savings: Additional Data and Analysis Could Provide Insight into Early Withdrawals, describing events that lead IRA owners and employer-sponsored retirement plan participants to make early withdrawals. These are distributions withdrawn generally before age 59½, and often expose the individuals to a 10 percent excise tax.

Limited statutory exceptions allow some early distribution recipients to escape this excise tax; these exceptions differ somewhat between IRAs and retirement plans. But early distributions likely reduce amounts available for expenses later in retirement.

The GAO used data from the IRS, U.S. Census Bureau, and Department of Labor, as well as interviews with taxpayers, plan sponsors and administrators, and retirement subject matter experts to generate this report.

Reasons for Early Withdrawals

These items are among the GAO’s findings.

  • Pressing financial needs—for such things as out-of-pocket medical expenses—were a common reason for early distributions.
  • Unpaid/offset plan loans, hardship distributions, and lump sums taken at separation from employment—versus execution of a rollover—led to many early distribution events.
  • Perceived complexity in transferring balances from one employer’s plan to another discourages some plan-to-plan rollovers.

Suggested Steps to Reduce Early Distributions

Survey interviewees offered suggestions on steps that could be taken to limit early retirement plan distributions.

  • Allow continued repayment of outstanding plan loans after separation from employment (beyond the extended time period created by the Tax Cuts and Jobs Act of 2017, which lengthened the eligible rollover period to an individual’s tax return due date for the year of loan offset, including tax filing extensions).
  • Restrict early access to employer-made retirement plan contributions.
  • Encourage partial distributions (rather than lump sums) when an employee separates from service with an employer.
  • Build emergency savings features into employer-sponsored retirement plans, with access criteria that differ from amounts earmarked for retirement.

Among its suggestions for continued monitoring of early withdrawals, GAO recommends that employer-sponsored retirement plans be required to report the incidence and the amounts of unpaid plan loans.