The Effects of Required Minimum Distribution Rules on Withdrawals from Traditional Individual Retirement Accounts

50 Pages Posted: 21 Apr 2016 Last revised: 27 Oct 2016

Jacob A. Mortenson

Joint Committee on Taxation, US Congress

Heidi R. Schramm

Joint Committee on Taxation, U.S. Congress

Andrew Whitten

U.S. Department of the Treasury - Office of Tax Analysis (OTA)

Date Written: October 25, 2016

Abstract

Traditional Individual Retirement Accounts (IRAs) are a substantial source of retirement savings. In 2013 individuals age 60 or older held $3.8 trillion in wealth in IRAs. Current law requires that some fraction of these funds be withdrawn each year beginning the year one turns 70.5 years of age, with the fraction increasing in age. We study the effects of these Required Minimum Distribution (RMD) rules on the asset decumulation behavior of retirees using a panel of administrative tax data from 1999 to 2014. This period encompasses a one-year suspension of the RMD rules in 2009, which we exploit for identification. Though the RMD rules are modest -- leaving one third of the original balance intact by age 90 even if investments generate zero returns -- they have substantive effects on behavior. We estimate that 52% of individuals subject to the rules would prefer to withdraw less than their required minimum but that over one third of these RMD-constrained individuals do not adjust their withdrawals in response to temporary changes in the rules. As further evidence that paying attention to the rules is costly, we find that individuals newly subject to RMD rules are disproportionately likely to close their IRAs. This paper is the first to study this effect of RMD rules and to show that the rules represent a binding constraint for the majority of IRA holders.

The appendix for "The Effects of Required Minimum Distribution Rules on Withdrawals from Traditional Individual Retirement Accounts" may be found at http://ssrn.com/abstract=2859088.

Keywords: Asset decumulation, income taxation, Individual Retirement Accounts, investment, required minimum distributions, retirement

JEL Classification: D14, H24

Suggested Citation

Mortenson, Jacob A. and Schramm, Heidi R. and Whitten, Andrew, The Effects of Required Minimum Distribution Rules on Withdrawals from Traditional Individual Retirement Accounts (October 25, 2016). Available at SSRN: https://ssrn.com/abstract=2764435

Jacob A. Mortenson

Joint Committee on Taxation, US Congress ( email )

Room 1625 Longworth House Office Building
Washington, DC 20515
United States

HOME PAGE: http://www.jacobmortenson.com

Heidi Rose Schramm (Contact Author)

Joint Committee on Taxation, U.S. Congress ( email )

H2-502 Ford House Office Building
Washington, DC 20515
United States

Andrew Whitten

U.S. Department of the Treasury - Office of Tax Analysis (OTA) ( email )

1500 Pennsylvania Ave., N.W.
Washington, DC 22203
United States

HOME PAGE: http://rawhitten.com

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