Early withdrawals or "leakage" from retirement accounts is not nearly as severe as thought, according to an analysis by the Investment Company Institute.
ICI said estimates of leakage are vastly overstated because they typically include non-penalized distributions, such as regular pension benefits paid to retired military, police and firefighters as well as distributions made after a worker dies or becomes disabled.
"For years, observers have used measures of taxable distributions received by younger taxpayers to create a narrative of massive leakage from retirement accounts," said Peter Brady, ICI senior economic adviser, in a news release. "With this new analysis, we were able to dig deeper into the data, and it's clear that non-penalized distributions generally should not be considered leakage."
A more reasonable estimate of leakage is the amount of distributions subject to penalty for early distributions, according to the authors. Distributions from retirement accounts by individuals younger than 59½ are generally subject to a 10% penalty under federal income tax law.
The analysis, which compared taxpayers' reports of retirement distributions on tax returns with information reported to the IRS by the payers of those distributions, found that penalized distributions accounted for only about half of taxable distributions received by taxpayers younger than 55.
In 2010, the year for which the data were analyzed, taxpayers younger than age 55 received $93 billion in taxable distributions, of which only $48 billion, or 51%, was penalized.
"Using the measure of penalized distributions, we see that leakage is occurring at about half the rate previously estimated," Mr. Brady said.