ABSTRACT
This study investigates how the timing of taxes on retirement savings affects spending. Our findings are based on an experiment where participants spend funds from either a deferred-tax account, where taxes are paid upon withdrawal, or a currently taxed account, which represents after-tax savings withdrawn tax-free. We find that deferred-tax account holders consume savings faster than currently taxed account holders with equal after-tax spending power. Further, given equivalent nominal balances, deferred-tax and currently taxed account holders spend nominally equivalent amounts on goods, despite deferred-tax account holders needing to pay taxes on withdrawals. This finding suggests deferred-tax account holders under-adjust for taxes and, therefore, consume their wealth faster. These findings have important implications for financial advisors and tax policy makers. They also add to a growing body of research showing that tax timing affects individual decision making and that currently taxed accounts often encourage individuals to make better retirement planning decisions.
Data Availability: Data are available from the third author, upon request.
JEL Classifications: H24; K34.