The Effects of Required Minimum Distribution Rules on Withdrawals from Traditional Individual Retirement Accounts
Jacob A. Mortenson
Joint Committee on Taxation, US Congress
Heidi R. Schramm
Joint Committee on Taxation, U.S. Congress
U.S. Department of the Treasury - Office of Tax Analysis (OTA)
October 25, 2016
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 Current law requires that some fraction of these funds be withdrawn each year beginning the year one turns 70.5 years of age, with the fraction increasing in age.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.
Number of Pages in PDF File: 50
Keywords: Asset decumulation, income taxation, Individual Retirement Accounts, investment, required minimum distributions, retirement
JEL Classification: D14, H24
Date posted: April 21, 2016 ; Last revised: October 27, 2016