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Tax policy, lump-sum pension distributions, and household saving

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  • Angela E. Chang
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    Abstract

    As of May 1988, over 8 million workers had received their pension benefits as lump-sum distributions (LSDs) when they changed jobs. In 1986 Congress imposed a 10% tax penalty on the amount of LSDs not rolled over into tax-deferred instruments. This paper examines the effects of this tax penalty on the rollover decisions of LSD recipients. The penalty increases the probability of rollover among higher-income recipients; an increase of 1 percentage point in the penalty is estimated to increase the probability of rollover by 1.1 percentage point. However, the penalty has not affected the rollover decisions of lower-income recipients, who are more likely to be liquidity-constrained.

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    File URL: http://www.newyorkfed.org/research/staff_reports/research_papers/9507.html
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    File URL: http://www.newyorkfed.org/research/staff_reports/research_papers/9507.pdf
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    Bibliographic Info

    Paper provided by Federal Reserve Bank of New York in its series Research Paper with number 9507.

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    Date of creation: 1995
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    Handle: RePEc:fip:fednrp:9507

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    Related research

    Keywords: Pensions ; Saving and investment ; Taxation;

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    Cited by:
    1. Olivia S. Mitchell & James F. Moore, 1997. "Retirement Wealth Accumulation and Decumulation: New Developments and Outstanding Opportunities," Center for Financial Institutions Working Papers 97-12, Wharton School Center for Financial Institutions, University of Pennsylvania.

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