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

In this paper, the authors investigate the extent to which pre-retirement savings withdrawals from tax-preferred accounts respond to changes in the net-of-tax benefit of withdrawing and whether such behavior depends on the saver’s financial literacy. Using Canadian data, they show that the correlation between savings withdrawals and the effective marginal tax rate is negative for those with higher financial literacy, but much weaker 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.