Temporary and permanent effects of withdrawal penalties on retirement savings accounts✩

Abstract

We investigate the impact of the early withdrawal penalty on Individual Retirement Account (IRA) withdrawals by examining behavior in a short window before and after the age when the penalty is lifted. We find a large, sudden increase in withdrawals after the penalty’s expiration of 3–3.5 times the baseline level, with no evidence of anticipatory behavior. After one month, average withdrawals decline to and persist at approximately double the baseline. We find that the short-run increase is more pronounced when liquidity constraints are more likely to have been binding. Finally, we explore the implications of our results for policies that adjust the age at which early penalties expire or policies that temporarily remove such penalties.