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Financial Literacy and the Timing of Tax-Preferred Savings Account Withdrawals

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  • Marianne Laurin
  • Derek Messacar
  • Pierre-Carl Michaud

Abstract

Tax deductions on contributions to registered savings vehicles are a common policy tool used by governments in many industrialized countries to encourage people to save for retirement. However, these plans do not typically lock in funds, which means savers may also withdraw before retirement when their marginal tax rates are still high and forgo the tax benefit. In this paper, we investigate the extent to which pre-retirement savings withdrawals respond to changes in the net-of-tax benefit of withdrawing and whether such behavior depends on the saver’s financial literacy. To that end, we link respondents of a nationally representative financial capability survey from Canada to over 15 years of administrative tax data. Our results show that the correlation between savings withdrawals and the effective marginal tax rate is negative for those with higher financial literacy, but much weaker and sometimes statistically insignificant for those with lower financial literacy. The findings suggest that financial literacy is an important determinant of the extent to which tax-deductible savings plans are used efficiently. Les déductions fiscales sur les contributions aux véhicules d'épargne enregistrés sont un outil politique commun utilisé par les gouvernements de nombreux pays industrialisés pour encourager les gens à épargner pour leur retraite. Cependant, ces plans ne bloquent généralement pas les fonds, ce qui signifie que les épargnants peuvent également retirer leurs fonds avant la retraite lorsque leur taux d'imposition marginal est encore élevé et renoncer à l'avantage fiscal. Dans cet article, nous étudions dans quelle mesure les retraits d'épargne avant la retraite répondent à des changements dans l'avantage net d'impôt du retrait et si ce comportement dépend de la littératie financière de l'épargnant. À cette fin, nous relions les répondants d'une enquête sur les capacités financières représentative au niveau national au Canada à plus de 15 ans de données fiscales administratives. Nos résultats montrent que la corrélation entre les retraits d'épargne et le taux d'imposition marginal effectif est négative pour les personnes ayant une meilleure culture financière, mais beaucoup plus faible et parfois statistiquement non significative pour les personnes ayant une moindre culture financière. Les résultats suggèrent que la littératie financière est un déterminant important de la mesure dans laquelle les plans d'épargne déductibles de l'impôt sont utilisés efficacement.

Suggested Citation

  • Marianne Laurin & Derek Messacar & Pierre-Carl Michaud, 2021. "Financial Literacy and the Timing of Tax-Preferred Savings Account Withdrawals," CIRANO Working Papers 2021s-36, CIRANO.
    • Handle: RePEc:cir:cirwor:2021s-36
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    File URL: https://cirano.qc.ca/files/publications/2021s-36.pdf
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    References listed on IDEAS

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    Cited by:

    1. Messacar, Derek, 2023. "Loss-averse tax manipulation and tax-preferred savings," Journal of Economic Behavior & Organization, Elsevier, vol. 207(C), pages 257-278.

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    More about this item

    Keywords

    tax-preferred savings accounts; retirement savings; financial literacy; comptes d'épargne à fiscalité privilégiée; épargne-retraite; éducation financière;
    All these keywords.

    JEL classification:

    • G53 - Financial Economics - - Household Finance - - - Financial Literacy
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance

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