Work

The impact of withdrawal penalties on retirement savings

Year: 2024

Type: article

Abstract: Tax-benefited retirement accounts have features designed to encourage saving, including a penalty for withdrawing before age 59.5. Account holders also face a penalty for failing to take required minimum withdrawals after age 72. Using a bunching analysis, we estimate that these penalties cause over 17% of traditional IRA holders to change their withdrawal timing each year, shifting almost $60 billion of distributions annually. We estimate a dynamic life-cycle model to analyze the effect of changing these penalties. For both penalties, we find alternative combinations of age threshold and penalty rate that lead to increased average welfare and lifetime tax remittances.

Source: Journal of Public Economics

DOI: 10.1016/j.jpubeco.2024.105083

Authors: Ellen Stuart, Victoria L. Bryant

Institutions: The University of Sydney, Internal Revenue Service

Language: English

Topic: Financial Literacy, Pension, Retirement Analysis

Subfield: Accounting

Field: Business, Management and Accounting

Domain: Social Sciences

Open Access status: hybrid

Estimated APC paid: $3,800

Funders: U.S. Social Security Administration, National Bureau of Economic Research