Individual Retirement Accounts Research Articles

PROPERTY TAX DEFERRAL: A PROPOSAL TO HELP MASSACHUSETTS SENIORS

Massachusetts citizens, like those in other states, face the prospect of inadequate retirement income. Social Security will provide less relative to pre-retirement earnings; 401(k) balances are generally meager; and half the private sector workforce does not have an employer-sponsored retirement plan. At the same time, the number of years spent in retirement has increased dramatically; health care costs are high and rapidly rising; and interest rates are at historic lows. In addition to these nationwide challenges, Massachusetts’ older residents face extraordinarily high housing costs and, as a result, rank among the most disadvantaged in terms of the gap between their required and actual resources. The three big levers to improve the retirement income situation are: 1) encourage people to work longer; 2) provide coverage for employees who do not have a retirement savings plan at work; and 3) enable older households to tap their home equity. States can assist on all three fronts to help individuals use their own resources to support themselves in retirement. They can publicize the advantage to individuals of staying in the labor force and to companies of hiring and retaining older workers. They can institute programs that require employers without a retirement plan to automatically enroll their workers in an Individual Retirement Account. And they can offer a program of property tax deferral that will enable homeowners to use some of their home equity to augment inadequate retirement income. This brief focuses on the third option, exploring one possible approach to property tax deferral that uses Massachusetts as an example. The discussion proceeds as follows. The first section describes the nation’s retirement income challenge and the particular problem created by Massachusetts’ high housing costs. The second section describes the major existing programs for homeowners’ relief in Massachusetts: two that cost the taxpayer and one that allows low-income homeowners to help themselves through limited property tax deferral. The third section describes a proposal for a new statewide program of property tax deferral that would be open to all homeowners. The fourth section addresses likely utilization and startup costs before the program becomes self-financing. The final section concludes that a comprehensive property tax deferral program offers enough promise to at least be tried as a pilot.

Static and Dynamic Tax Diversification of Withdrawals from Multiple Individual Retirement Accounts

This article shows why diversified simultaneous retirement funding drawn from accounts with differing tax treatments will save more on taxes than sequential withdrawal. We utilize dynamic programming to quantify the optimal funding under the assumption that the goal is to maximize the total discounted after-tax consumption and bequest amounts. The dynamic programming setting uses the actual tax schedule, considers the required minimum distribution and life expectancy, and constrains consumption with upper and lower bounds. We also find the optimal funding through static diversification, a simple optimization schema. We compare the static and full dynamic programming solutions in two cases, one for a single filer and another for a married joint filer. The static and the full dynamic programming solution differ more in the single filer case than in the married joint filer case. The static optimal withdrawal is close to sequential withdrawal. The full dynamic programming’s optimal withdrawal is close the sequential withdrawal when both types of accounts have a substantial balance.

Addition to the RAND HRS Longitudinal Files: IRA Withdrawals in the HRS, 2000 to 2014

In support of research on the older population, we produced cleaned variables based on data from the Health and Retirement Study (HRS) to capture information on withdrawals from individual retirement accounts (IRAs). Where necessary, imputations for missing values have been performed using methods consistent with those employed in the RAND HRS. To facilitate analyses of retirement resources, we also included approximations of annualized IRA withdrawal amounts. The cleaning and derivation of the new variables has been fully integrated into the RAND HRS production process so that maintenance and the addition of future waves can be achieved with relatively small effort. Construction of the new variables for HRS waves 2000 to 2014 has been completed; the corresponding variables for HRS 2016 are currently being processed along with the entire HRS 2016 core data. The full set of new IRA withdrawal variables (HRS waves 2000 to 2016) will be made available to the research community with the next release of the RAND HRS Longitudinal File, including detailed documentation as part of the accompanying codebook. Based on these new variables, we found that about 16 percent of HRS households withdrew money from their IRA accounts since the last interview, and conditional on making a withdrawal, the average total withdrawal amount is about $23,000 in the later HRS waves.

Deferred Income Annuity Purchases: Optimal Levels for Retirement Income Adequacy

The prospect of outliving retirement savings is a very real risk for many Baby Boomers and Gen Xers. Yet, only a very small percentage of defined contribution (DC) and individual retirement account (IRA) balances are annuitized — and a significant percentage of defined benefit (DB) accruals have been taken as lump-sum distributions when the option was available. Some believe that cost is an issue; Deferred Income Annuities (DIAs) are designed to reduce the probability of outliving savings by providing monthly benefits in the later stages of retirement. Because of their delayed payments, DIAs could be offered for a small fraction of the cost for a similar monthly benefit through an annuity that starts payments immediately at retirement. Many believe that the lower cost would at least partially mitigate retirees’ reluctance to give up control over a large portion of their DC and/or IRA balances at retirement age. New research was prepared for this Issue Brief to explore how the probability of a “successful” retirement, measured by the EBRI Retirement Readiness Rating (RRR), varies with the percentage of the 401(k) balance that is used to purchase a DIA. Results are provided for all households (with a 401(k) balance) combined as well as by simulated age of death. The results are also provided by age-specific wage quartiles. We find that, at current annuity rates, purchases of a DIA at age 65 deferring 20 years with no death benefits result in an overall improvement in RRR (for all ages of death combined) for DIA purchases equal to 5, 10, 15, and 20 percent of the 401(k) balance. However, there is an overall decrease in RRR for DIA purchases equal to 25 and 30 percent — due in part to the interaction with long-term care costs. If a pre-commencement death benefit is added to the DIA, there is an overall improvement in RRR for DIA purchases equal to 5, 10, and 15 percent of the 401(k) balance. When the results are broken out by age at simulated death, we find overall decreases in RRR for those dying before benefits begin (ages 65–84) as well as for those dying soon after benefits begin (ages 85–89). For each of the groups living beyond age 89 we find an increase in RRR, and, as expected, the larger the percentage of 401(k) balance used to purchase a DIA, the larger the percentage increase in RRR. The results are significantly improved by adding a pre-commencement death benefit for those who die before benefits begin, but this is offset by larger decreases in RRR for those dying between ages 85 and 89 and smaller increases in RRR for those living beyond age 89. The need for longevity protection is arguably less for those in the lowest wage quartile given their greater reliance on Social Security. We broke out the overall RRR changes by age-specific wage quartiles and found that in all but the smallest DIA purchase (5 percent of the 401(k) balance), households in the lowest age-specific wage quartiles experienced a decrease in RRR from the purchase of a DIA without a pre-commencement death benefit. However, households with higher wages had a much more positive experience, with those in the second age-specific wage quartile experiencing an increase in RRR for all purchases through the 20 percent value. Households in the third age-specific wage quartile experienced an increase in RRR for all purchases through the 25 percent value, and those in the highest age-specific wage quartile experienced an increase in RRR for all purchases simulated (through the 30 percent level).

Individual Tontine Accounts

An individual tontine account (ITA) is an investment product similar to a conventional brokerage account, but with the added feature of mortality pooling through participation in an open-ended fair tontine. The ITA exploits the property that participants in a fair tontine need not be confined to a common investment portfolio or to a common payout method. Instead, participants are allowed to select and trade investments as they wish and to choose from a variety of payout methods, with each participant's results being largely unaffected by the investment and payout choices of others. We envision the ITA as being complementary to an individual retirement account (IRA), allowing retirees to derive extra income from savings without taking on additional investment risk and to obtain lifetime income at a lower cost than with comparable insurance products. The mortality-pooling features of ITAs compare favorably to those of insurance products. The cost per dollar of income is lower. The opportunity for individual choice is increased. Fees are transparent rather than opaque. Accounting is transparent and conveyed simply on account statements. The downside of ITAs is that income from mortality pooling is not guaranteed, and a participant might experience less income than hoped for if other participants live longer than expected. ITAs represent a new arrow in the quiver for addressing global retirement needs and may address the “annuity puzzle” by giving retirees a more transparent, lower-cost alternative to insurance-based products.

Dualism of Government Guarantees: Evidence from the 2005 FDI Reform Act

I present a novel approach to the study of the trade-off between stability and moral hazard induced by deposit insurance. Specifically, I use the FDI Reform Act of 2005 as an exogenous shock to the existing insurance scheme in the US and study its impact on bank risk. This reform raised the coverage limit for individual retirement accounts (IRAs) from USD 100,000 to 250,000. I report an increase in banks’ liquidity and insolvency risk caused by this Reform. In addition, I show banks more influenced by the 2005 reform were 38 percentage points less likely to fail during the GFC.

Retirement Security: Improved Guidance Could Help Account Owners Understand the Risks of Investing in Unconventional Assets

Federal data collection efforts to date have captured little information on retirement accounts holding unconventional assets — such as real estate, precious metals, private equity, and virtual currency — making the prevalence of such accounts unknown. In tax year 2015, the Internal Revenue Service (IRS) began requiring that custodians or trustees of individual retirement accounts (IRA) — including banks or other institutions approved to hold account assets — report selected information on unconventional assets in their clients' accounts to IRS. As of November 2016, IRS plans to begin compiling the new IRA asset data in 2017, but has not specified when the new IRA asset data will be available for analysis. Seventeen of the 26 custodians, who GAO identified as allowing retirement accounts with unconventional assets and who participated in GAO's data collection effort, reported having nearly half a million of these accounts in their custody at the end of calendar year 2015. IRAs made up the vast majority of accounts and assets reported.An IRA owner's decision to invest in unconventional assets can expand their role and responsibilities substantially. GAO's review of industry documents found that individuals wanting to invest in unconventional assets through their IRA generally agree to be responsible for overseeing the selection, management, and monitoring of account investments and shoulder the consequences of most decisions affecting their accounts. For example, owners of such accounts assume a fiduciary role, which makes them assume greater responsibility for overseeing the selection, management, and monitoring of account investments, and shoulder the consequences of most decisions affecting their accounts.Current IRS guidance provides little information to help IRA owners understand their expanded responsibilities and potential challenges associated with investing in unconventional assets. Targeted IRS guidance for these IRA owners may help them navigate the potential compliance challenges associated with certain types of unconventional assets. For example, GAO found that some IRA owners can experience challenges in the following areas:• Monitoring for ongoing federal tax liability: IRA owners are not always aware of the need to monitor the gross income from certain unconventional assets in their accounts for ongoing federal tax liability. For example, IRA owners who invest in active businesses or debt-financed properties need to monitor their accounts for ongoing tax liability that must be paid from the IRA. Failure to do so can result in underpayment penalties.• Obtaining annual fair market valuations for nonpublicly traded assets: IRA owners investing in hard-to-value unconventional assets can face challenges meeting their responsibilities to provide updated fair market value information to their custodian to meet IRS's annual reporting requirement. Failure to provide an updated fair market value in a timely manner can result in a custodian prematurely distributing account assets to the owner at a fair market value that is.

How Hard Should We Push the Poor to Save for Retirement?

More than half of U.S. states are working to establish programs what would automatically enrollment in Individual Retirement Accounts (IRAs) workers who are not offered a retirement plan by their employer. These programs are designed to address a perceived shortfall of retirement saving, particularly among low-wage workers who are less likely to be offered an employer-sponsored plan. But the designers of state-run auto-IRA plans fail to consider three questions: Do the poor need to save more for retirement? Will state-run auto-IRA plans increase net household savings? And, after accounting for interactions with means-tested government transfer programs, will state-run auto-IRA plans make the poor better off? The answer to all three questions may be “no.” First, tax data indicate that most low-income retirees have incomes adequate to maintain their pre-retirement standard of living. Second, recent research has found that employees automatically enrolled in retirement plans may accrue additional debts that offset much or all of their own contributions. Third, income- and asset-tests for federal and state transfer programs could reduce benefits to low-earners in substantially greater amounts than they could save in auto-IRA accounts. In light of these issues, policymakers should reconsider the design of state-run auto-IRA programs. One potential improvement is to exempt truly low-earning workers, such as those with earnings below $12,000, from automatic enrollment in these plans while leaving open the option to voluntary participate.

Zachowanie społeczeństwa wykorzystującego Indywidualne Konta Emerytalne na tle WIG20

Aim: The topic of the pension pillar III, a voluntary pension scheme, is occasionally addressed in the media making the public wonder whether it is possible to live a dignified life after retirement. The article makes the attempt to show how households’ interest in Individual Retirement Accounts (in the paper referred to as IKE) has changed in relation to the WIG 20 index. The author believes that the behavior of the capital market influences the public in its decision-making with regard to funds accumulation under the IKE pension system.The aim of the paper is to examine the relationship between household’s showing interest in setting up an individual retirement account and the WIG20 index fluctuation. The study was conducted based on data spanning 12 years, i.e. from 2004 to 2015. The paper outlines the characteristic features of IKE pension accounts, as well as the impact of the stock index WIG20 on the flow of funds placed with IKE.Research method: The analysis using Pearson’s correlation coefficient indicated a small dependency between the number of IKEs and WIG20.Findings: Having examined the different segments if IKE, an unexpected dependency between IKE in a voluntary pension scheme managed by PTE /Universal Pension Fund Company/ and the WIG20 was found.Implications: Investors may find the paper interesting seeing it as a determinant in making investment decisions; it could also be of interest to scholars seeking to investigate in more depth the topic relating to the third-pillar.Limitations: The limitation of the study was lack of data on inactive accounts which have not been deleted.

To Roll or Not to Roll: A Framework for Assessing the Benefit of IRA Rollovers

The U.S. Department of Labor’s new fiduciary rule will significantly affect U.S.-based financial advisors that provide guidance on individual retirement account (IRA) rollovers. The new rule requires all advisors to act as fiduciaries when making recommendations and/or giving advice on defined contribution (DC) plans or IRAs—including recommendations for a rollover or a distribution. There is little research on what determines whether a rollover is in the best interests of an investor. This article briefly outlines a framework to make this decision, with a focus on the potential decision to roll retirement savings into an IRA managed by a financial advisor. Fees, the quality and scope of investments offered, and the quality and scope of services being provided (e.g., financial planning), as well as other unique considerations should all be considered. The authors suggest that the potential benefits of rolling funds out of a DC plan depend on the unique circumstances and preferences of each investor, and therefore considerable care is needed to ensure that the proper decision is reached. <b>TOPICS:</b>Retirement, legal/regulatory/public policy

The financial feasibility of delaying Social Security: evidence from administrative tax data

AbstractDespite the large and growing returns to deferring Social Security benefits, most individuals claim Social Security before the full retirement age. In this paper, we use a panel of administrative tax data on individuals likely to financially benefit from delaying Social Security claiming to explore the relationship between Social Security claiming and distributions from tax-advantaged retirement savings accounts. We find that the majority of our sample claim Social Security prior to taking distributions from Individual Retirement Accounts (IRAs). We also find that a third of our sample have IRA balances equivalent to at least two additional years of Social Security benefits, and a quarter have IRA balances equivalent to at least 4 years of Social Security benefits. We complement our analysis with data from the Health and Retirement Study and find that these percentages are considerably higher when other financial assets are taken into account.

An Investigation on Early Voluntary Withdrawals from Individual Retirement Accounts: An Empirical Study on an Emerging Market

Early withdrawals from individual retirement accounts are one of the main problems of pension companies in both developed and emerging countries. The aim of this study is to identify the potential reasons behind decisions to withdraw early from the individual retirement system in Turkey. Using Cox proportional hazards model, we find that there is a significant negative relationship between financial literacy and withdrawal probability. Our results reveal that men and younger individuals are more likely to make an early withdrawal. We also find that individuals who experience liquidity constraints and income shocks tend to withdraw their contracts earlier. Further analysis suggests that the effect of variables remarkably changes among different subgroups. We believe that our findings will assist both pension managers and policymakers to design better retirement plans and to take steps to prevent voluntary withdrawals in the long term.

An Online Appendix to 'The Effects of Required Minimum Distribution Rules on Withdrawals from Traditional Individual Retirement Accounts'

This online appendix to "The Effects of Required Minimum Distribution Rules on Withdrawals from Traditional Individual Retirement Accounts" includes derivations, estimation details and additional graphical analysis.The paper "The Effects of Required Minimum Distribution Rules on Withdrawals from Traditional Individual Retirement Accounts" may be found at http://ssrn.com/abstract=2764435.

Civilizing the Roth IRA Monster

The accompanying Article is not a financial planning guide on whether to contribute or convert funds into a Roth Individual Retirement Account (Roth IRA). Legions of advice already exists to help analyze that choice. Instead, the Article addresses the Roth IRA from a public policy perspective.The Roth IRA is a seemingly innocuous after-tax personal retirement savings arrangement. The law, however, has received fierce policy criticism since its enactment less than two decades ago. For example, the title of this Article stems from one such criticism. A 2011 Op-Ed admonished that the Roth IRA is a dangerous “fiscal Frankenstein” destined to “wreak havoc” on the U.S. Treasury. Notwithstanding, Presidents Clinton, Bush, and Obama have all signed off on legislation enacting or expanding the Roth IRA. Further, the public has already poured $660 billion into Roth IRAs and the inflows are growing fast.Consequently, this Article takes a fresh look at the Roth IRA. The Article does find serious flaws in the existing law. In particular, a 2014 GAO report estimated 300 people had IRAs worth at least $25 million. Similarly, a 2012 Forbes article noted that Max Levchin, a 36 years old high-tech entrepreneur, had built a Roth IRA worth at least $95 million. Skewed wealth accumulations, along with the statutory feature that allows beneficiaries to stretch distributions over their lifetimes, present serious income inequality issues. The Article therefore concludes by offering recommendations to turn the rampaging beast into a benevolent benefactor.

Ownership of individual retirement accounts – an empirical analysis based on SHARE

This paper examines the household retirement saving decisions in what concerns to the ownership of Individual Retirement Accounts (IRAs) in eight European Union (EU) countries. IRAs are more and more seen as an alternative to public pension benefits, which are decreasing. Therefore, understanding the enrolment in IRAs, both the socio-economic factors and over time, is most important. Detailed empirical analysis of the factors that might influence the ownership of IRAs is presented based on Survey of Health Ageing and Retirement in Europe (SHARE), using data from Wave 2 (2006–2007) and Wave 4 (2010–2011). Further, to analyse the impact of legal retirement age in the ownership of IRAs, two subsamples are considered: people aged between 50 and 64 years old (50–64 years) and people aged 65 or over (≥ 65 years). The results suggest that age, years of education, income and ownership of dwelling influence positively and significantly household saving, while number of children, marital status and risk aversion have a negative effect. Marital status and income are not statistically significant for retired people. Policy implications are derived.

Achieving American Retirement Prosperity by Changing Americans' Thinking About Retirement

There are many decisions that Americans have to make about retirement before, at, and after retirement. For example, Americans have to decide when to start saving for retirement, how much to save, how to invest those savings, when to retire, when to claim social security, and how to take required minimum distributions from 401(k) plans or Individual Retirement Accounts. Different things can go wrong at each of these decisions for different reasons. Many Americans, for various reasons, including insufficient energy, money, motivation, time, and understanding, do no retirement planning. Some Americans do some retirement planning, yet worry they are doing insufficient or ineffective retirement planning. A few knowledgeable or wealthy Americans do, or have done for them, sufficient and effective retirement planning. Insufficient or ineffective retirement planning causes Americans to experience decreased financial wealth, health, objective living standards, and subjective well-being in addition to suffer increased anxiety, depression, stress, and worry. Our American economy also has to deal with the resulting negative externalities of many Americans retiring into poverty. This Article analyzes how Americans can achieve retirement prosperity by changing their thinking about retirement. This Article advocates the American federal government educate Americans in thinking about retirement to utilize more thinking tools, think more mindfully, and think more societally. This Article’s proposals are based on and introduce to retirement planning the field of cognitive economics.

Target Risk Funds

There is a vast literature which shows that investors don't make rational decisions in allocating resources among different investments. Target risk funds and target date funds are two types of mutual funds primarily organised as fund of funds that make the asset allocation decision for an investor. Both are used as options in 401(k) plans and Individual Retirement Accounts. However they control for risk in very different ways. Target risk funds have not been studied. This article is the first comprehensive study of their characteristics and performance and how they compare to target date funds as an investment.

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

Traditional Individual Retirement (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.

Public Sector Pension Plans for Private Sector Workers

It has long been recognized that millions of Americans do not have access to pensions or retirement savings programs at work. Various efforts have been made to address this problem legislatively. None have been particularly successful. The Obama Administration proposed the creation of a federal automatic enrollment Individual Retirement Account (IRA), but Congress would not act. Several states took an interest in the problem but were hindered by a number of problems, most importantly by the question of Employee Retirement Income Security Act of 1974 (ERISA) coverage. President Obama directed the Department of Labor to find a way around the ERISA preemption, which it did by extending the 1975 safe harbor regulations to state-operated payroll deduction IRAs. California’s Auto IRA program became effective on January 1, 2017. Others will soon follow.

An Empirical Analysis of Possible Reforms to the Disability and Survivors Insurance in Chile

This paper examines the costs of two possible reforms to the Disability and Survivors Insurance in Chile. The first is to separate insurance rates not only by sex but also by age segment. Within this proposal, we determine the most appropriate age groups for differentiating insurance premiums based on this variable, and assess the advantages and disadvantages of charging the maximum rate to all contributors, capitalizing the difference between that rate and the age-differentiated premiums in the individual retirement account. The second proposal to be evaluated is to let the system cover only the economic risk of the inability to work from the date of a claim until normal retirement age (disability claim) or the inability to contribute to household income in the event of death.