What Explains Early Withdrawals from Retirement Accounts? Evidence from a Panel of Taxpayers‪.‬

INTRODUCTION Over the past 20 years, tax-deferred accounts (TDAs) such as Individual Retirement Accounts (IRAs) and employer-sponsored plans (ESPs) have become a key component of individual retirement planning, (1) Although such accounts can take on many guises, they generally share two features--tax-exempt account earnings and withdrawal restrictions before retirement. (2) Early withdrawals are generally subject to a 10 percent penalty, and, in the case of 401(k) plans, are prohibited outright except in cases of economic hardship or separation from the employer. A recent Administration proposal for establishing a new type of TDA with no early withdrawal penalties has brought into sharp relief the role of such penalties in shaping household behavior. Would households with free access to their TDA assets continually run them down, or would the increased liquidity encourage new savings by households with precautionary motives? One way to shed some light on this question is to examine what leads to pre-retirement withdrawals under the current system.