How Do Distributions from Retirement Accounts Respond to Early Withdrawal Penalties? Evidence from Administrative Tax Returns
To preserve retirement wealth, IRAs and employer-sponsored defined contribution plans typically impose a penalty on early withdrawals. How might individuals respond if the penalty were lifted?
While the goal of conventional retirement savings accounts is to accumulate wealth for retirement, pre-retirement withdrawals can act as a form of insurance against financial shocks. This study examines the withdrawal behavior of IRA account holders as they cross the age 59 ½ threshold and weighs the implications of potential policy changes, such as modifying the age threshold for withdrawals and the amount of early withdrawal penalties.
To gauge the relationship between removal of the IRA withdrawal penalty and subsequent withdrawals, the researchers compared the behavior of people with different dates of birth. If differences in withdrawals between the calendar year in which a person turns 58 ½ and 59 ½ vary systematically with date of birth, it suggests evidence of a jump in withdrawals at age 59 ½. The researchers investigate this jump and the relationship between date of birth and changes in withdrawals across calendar years near age 59 ½.