An Investigation of Rational Expectations Framing Effects on Participation in Individual Retirement Accounts Using Tax Return Data

Charles R Enis
Pennsylvania State University

Abstract: Abstract -- We examined the association between psychological factors and traditional IRAs (1983-1985). The data were panels of tax returns representing households qualifying for the maximum IRA contribution, and whose only sources of income were employment and investments. Along with expected utility variables, the Tobit regressions tested for framing effects using reference points based on prior years realizations. Savings propensity and past participation were the most important factors linked to IRAs. Unexpected investment income was significantly related to IRAs suggesting the creation of new savings. Households having withholding positions less favorable than expected increased IRA participation. This finding favors deductible versus Roth IRAs because the former offers a legal means after yearend for improving an unfavorable position.

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