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The impact of withdrawal penalties on retirement savings

Author

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  • Stuart, Ellen
  • Bryant, Victoria L.

Abstract

Tax-benefited retirement accounts have features designed to encourage saving, including a penalty for withdrawing before age 5912. 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.

Suggested Citation

  • Stuart, Ellen & Bryant, Victoria L., 2024. "The impact of withdrawal penalties on retirement savings," Journal of Public Economics, Elsevier, vol. 232(C).
    • Handle: RePEc:eee:pubeco:v:232:y:2024:i:c:s0047272724000197
    DOI: 10.1016/j.jpubeco.2024.105083
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    More about this item

    Keywords

    Retirement savings; Retirement income; Tax penalties;
    All these keywords.

    JEL classification:

    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue
    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions

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