IRA-TYPE SAVINGS PLANS: FRAMING EFFECTS ASSOCIATED WITH THE FORM AND TIMING OF THE TAX BENEFIT (INDIVIDUAL RETIREMENT ACCOUNT, ROTH IRA)

One means by which the U.S. government has attempted to stimulate the historically low savings rate is through the creation of Individual Retirement Accounts (IRAs). The IRA is a "front-loaded" savings plan: eligible contributions are tax deductible and investment returns are tax-deferred. Recently, a law was enacted which will create a "back-loaded" IRA-type savings plan: no deduction will be allowed for contributions, but qualified withdrawals will be tax-free.; Back-loaded and front-loaded IRAs can be designed to be economically equivalent if the tax rate at the time of contribution is the same as at the time of withdrawal. Back-loaded plans will have the added political advantage of providing increased tax revenues in the early years of the plans. However, framing theory and anecdotal evidence suggest that these new plans may not be as popular with taxpayers as the currently available front-loaded IRAs.; In this study I presented economically equivalent front and back-loaded IRA-type savings plans to a randomly selected sample of University of Kentucky employees. The purpose was to determine whether the participants would exhibit a preference for the front-loaded plan type. The data was analyzed using logistic regression models and other statistical tests. Some evidence was provided that participants as a group tended to prefer the back-loaded plan type. However, participants who correctly answered both a comprehension and manipulation check question had no preference between the two plan types. Neither group preferred the front-loaded plan, modelled on the current IRA. The results of this study suggest that the new back-loaded savings plans will be appealing to U.S. taxpayers.