Information, the Introduction of Roths, 

and IRA Participation 

by 

Warren B. Hrung 

U.S. Department of the Treasury 

OTA Working Paper 91 December 2004 

more information would have led to a potentially sizable increase in participation for taxpayers 
Information, the Introduction of Roths, 

and IRA Participation 

by
 

Warren B. Hrung
 

U.S. Department of the Treasury
 

OTA Working Paper 91 December 2004
 

Abstract: This study investigates the issue of whether part of the increase in total IRA 

contributions from 1997 to 1998 can be attributed to increased advertising due to the introduction 

of Roth IRAs in 1998. In this study, the use of a tax preparer will proxy for exposure to 

information regarding IRAs. A preparer is expected to have less of an influence on IRA 

participation in 1998 relative to 1997. Evidence supports this prediction amongst taxpayers 

eligible for an IRA contribution in both 1997 and 1998. However, evidence also suggests that 

more information would have led to a potentially sizable increase in participation for taxpayers 

newly eligible for an IRA contribution in 1998. 

OTA Papers is an occasional series of reports on the research, models, and data sets developed to 

inform and improve Treasury's tax policy analysis. The papers are works in progress and subject 

to revision. Views and opinions expressed are those of the authors and do not necessarily 

represent official Treasury positions or policy. OTA papers are distributed to document OTA 

analytic models and data and to invite discussions and suggestions for revision and improvement. 

Comments are welcome and should be directed to the authors. 

The author is especially grateful to Alex Minicozzi for detailed comments and suggestions on an 

earlier draft and would also like to thank Pete Brady, Paul Burnham, Bob Carroll, Aaron Edlin, 

Pete Sailer, an anonymous referee, and seminar participants at the Department of the Treasury for 

very helpful comments, as well as Bob Carroll, John Eiler, and Bob Gillette for assistance with 

the tax data. All remaining errors and omissions are the author’s. Comments welcome at 

warren.hrung@do.treas.gov. Also available from The Berkeley Electronic Press as "Information, 

the Introduction of Roths, and IRA Participation", Contributions to Economic Analysis & Policy: 

Vol. 3: No. 1, Article 6. http://www.bepress.com/bejeap/contributions/vol3/iss1/art6 

Office of Tax Analysis 

Department of the Treasury 

Washington, DC 20220 
1
 

I. Introduction 

Social Security, employer pensions, and private savings are the legs in the oftenused metaphor of the three-legged stool that represents the U.S. retirement system. Of 

the three, Social Security provides the bulk of support for most retirees, while pensions 

and private savings provide a much smaller share.1 Individual Retirement Accounts 

(IRAs) have been one of the government’s primary programs aimed at encouraging 

private savings since the early 1980s. Concern over the lack of sufficient accumulation 

of private savings for retirement has resulted in proposals to expand IRAs in almost every 

recent Federal legislative session. 

Legislation passed in 1997 expanded eligibility for deductible IRAs and also 

created Roth IRAs. In contrast to deductible IRAs, Roth contributions consist of aftertax dollars. Eligibility for Roth contributions is based only on income, not income and 

pension status.2 As a result, many taxpayers previously not eligible to make IRA 

contributions could now contribute to a Roth IRA. IRA participation increased from 

3.3% in 1997 to 5.9% in 1998. Increased advertising and promotion of Roth IRAs may 

partially explain the increase in IRA contributions (deductible and Roth) from 1997 to 

1998. 

The difficulty in examining this claim directly is that exposure to IRA advertising 

is unobserved.3 Furthermore, while more advertising is expected to have a positive effect 

on IRA participation, increased confusion over eligibility may have had a negative effect 

on IRA participation. This confusion could have been due to the eligibility expansion for 

deductible IRAs in 1998 or the introduction of Roth IRAs; especially since many 

taxpayers were eligible for both types of IRAs. The lack of a ceteris paribus change in 

IRA advertising complicates any analysis. 

Using an extract from a random sample of tax returns for 1997 and 1998, this 

study will indirectly examine the relationship between advertising and IRA participation 

by studying whether more information via a tax preparer influences IRA participation. 

Good tax preparers inform clients of potential tax-minimizing strategies and taxpayers 

hiring preparers, all else equal, would contribute to IRAs more often in both 1997 and 

1998. More advertising and promotion of IRAs in 1998 than in 1997, under the 

hypothesis, would imply that hiring a preparer has less of an influence on IRA 

participation in 1998 than in 1997.4 

The hiring of a tax preparer is non-random and is likely to be endogenous. 

instrument for tax preparer status with the number of supporting forms not related to 

income. These forms are related to the hiring of a preparer since they increase the 

complexity of a given return. They are also not related to IRA eligibility and are not 

expected to be directly related to decisions regarding IRAs. 

I find that tax preparers had less influence on IRA participation in 1998 than in 

1997 amongst taxpayers eligible for an IRA contribution in both 1997 and 1998. 

1

 See Smith (2002).
 2

 Earnings are necessary to be eligible for both types of IRAs.
 3

 While there is no direct evidence of increased advertising of IRAs in 1998, there is anecdotal evidence 
 

that advertising increased from 1997 to 1998.
 4

 Tax preparers can only inform taxpayers about the opportunity to contribute to an IRA. It is still up to the 
 

taxpayer to actually follow-through on any recommendation. 
 

I 
2 

Examining taxpayers eligible in both years is an attempt to isolate the advertising effect 

since confusion over IRA eligibility likely remained relatively constant for this group. 

However, I also find evidence suggesting that more information regarding IRAs would 

have led to a potentially sizable increase in participation for taxpayers newly eligible for 

an IRA contribution in 1998. 

I also examine the relationship between tax preparers and the amount contributed 

to IRAs. The results are similar to those for IRA participation as I find that hiring a 

preparer is associated with larger contributions to an IRA in 1997, but not in 1998 for 

taxpayers that I observe in both years. 

The results in this study will help determine whether more resources by the 

government or financial institutions should be devoted to informing the public about 

IRAs in an effort to increase IRA participation. The results may have implications for 

other programs, not just tax-preferred savings incentives for retirement, in helping to 

determine whether or not non-economic factors influence participation decisions.5 

The paper is structured as follows. Section II contains background on deductible 

and Roth IRAs. A literature review can be found in section III. The data are described in 

section IV and the empirical results are presented in section V. Section VI concludes. 

II. Background on IRAs 

Deductible IRAs were first introduced in the United States in 1974 as a taxpreferred savings vehicle for those without pensions. From 1982-1986, all working 

taxpayers up to age 70.5 were eligible for tax-deductible contributions to an IRA. A 

worker could contribute up to $2,000 a year into an IRA, and a non-working spouse 

could contribute an additional $250. Earnings on IRA assets are allowed to accrue taxdeferred. Taxes are levied at the ordinary income rate instead of the capital gains rate 

when IRA assets are withdrawn at retirement. A penalty in addition to taxes is imposed 

if assets are withdrawn before age 59.5 and there are rules regarding required 

distributions from IRAs once the owner reaches age 70.5. 

The Tax Reform Act of 1986 (TRA86) restric ted eligibility for tax-deductible 

contributions for high-income taxpayers with employer-provided pensions beginning in 

the 1987 tax year. However, earnings were still allowed to accrue tax-deferred in all IRA 

accounts. All taxpayers remained eligible to make a non-deductible contribution to an 

IRA. Non-deductible IRA contributions will not be examined in this study. IRA 

participation plummeted from 1986 to 1987 and remained fairly steady thereafter. 

Subsequent legislation increased the limit for non-working spouses and provided for nonpenalized early withdrawals under certain situations. By 1997, a non-working spouse 

could contribute up to $2,000 to an IRA. In 1998, eligibility for deductible contributions 

was expanded substantially for some taxpayers. For married couples where only one 

spouse is covered by a pension plan, the income limit above which a deductible 

contribution is not allowed for the non-covered spouse was increased from $50,000 

modified Adjusted Gross Income (AGI) to $160,000 modified AGI. The top three panels 

5 Holden (2003) cites survey data showing that 61% of U.S. households are “not at all” familiar with 529 

plans, which are a tax-preferred savings incentive geared towards college education expenses. 
---

---

---

---

3 

of Table 1 summarize the eligibility requirements for a deductible IRA contribution for 

1986, 1987, 1997, and 1998. 

Table 1. Eligibility for Deductible/Roth IRA in 1986, 1987,1997 and 1998: 

Modified AGI level above which a deductible/Roth IRA contribution is not allowed 

Not Covered 

Spouse by Pension 

Covered by Covered by (Both Spouses 

Pension Pension if MFJ) 1986 Deductible IRA 

Contribution Limit= $2,000 for a spouse with earnings; $250 for a non-working spouse 

Married Filing Jointly No Limit No Limit No Limit 

Single/Head of Household No Limit No Limit 

1987/1997 Deductible IRA 

1987 Contribution Limit= $2,000 for a spouse with earnings; $250 for a non-working spouse 

1997 Contribution Limit= $2,000/spouse 

Married Filing Jointly $50,000 $50,000 No Limit 

Single/Head of Household $35,000 No Limit 

1998 Deductible IRA 

Contribution Limit= $2,000/spouse 

Married Filing Jointly $60,000 $160,000 No Limit 

Single/Head of Household $40,000 No Limit 

1998 Roth IRA 

Contribution Limit= $2,000/spouse 

Married Filing Jointly $160,000 $160,000 $160,000 

Single/Head of Household $110,000 $110,000 

See U.S. Internal Revenue Service, Publication 590 in the respective years for the proper definition of 

modified AGI. The definition changes as the number of adjustments to income change over time. 

In 1998, Roth IRAs were available for the first time. Contributions to a Roth IRA 

are not deductible and eligibility is based only on income (and earnings). All taxpayers 

under the income limits are eligible regardless of pension status. Earnings are tax-free as 

withdrawals are not taxed. A penalty is still imposed for early withdrawal, but 

contributions can be made beyond age 70.5. The minimum distribution rules that apply 

to deductible IRAs do not apply to Roth IRAs while the owner is still alive. The bottom 

panel of Table 1 summarizes the eligibility requirements for a Roth IRA contribution in 

1998.6 Many taxpayers are eligible for both types of IRAs; any taxpayer without a 

pension with modified AGI under the limit for Roths would be eligible for both. The 

6

 Note that modified AGI is defined slightly differently for a Roth IRA. Modified AGI for Roths takes into 

account any income related to a conversion of deductible or non-deductible IRA assets to a Roth IRA. This 

type of conversion was first available in 1998. 
4 

income limits for deductible IRAs do increase over time, but the income limits for Roth 

IRAs do not. The most recent reform in The Economic Growth and Tax Relief 

Reconciliation Act of 2001 increased contribution limits for both types of IRAs 

beginning in 2002. 

Table 2 presents IRA contribution information for 1997 and 1998.7 Total IRA 

contributions (deductible plus Roth) increased substantially from 1997 to 1998. The 

table shows that the percent of taxpayers eligible for a deductible or Roth IRA 

contribution increased from 70% to 86% from 1997 to 1998. The number of returns with 

an IRA deduction decreased from 1997 to 1998, but the total number of IRA contributors 

(deductible and Roth) increased from 4.1 million in 1997 to 7.4 million in 1998. 

Contributions went from $8.7 billion in 1997 to over $16 billion in 1998. 

Table 2. IRA Contributions 1997-1998 

1997 1998 

% Returns eligible for a deductible/Roth IRA Contribution* 70.2% 85.7% 

Returns with Deductible IRA ('000s) 

Deductible IRA Contributions ($millions) 

Returns with Roth IRA ('000s)* 

Roth IRA Contributions ($millions)* 

Total Returns ('000s) 

% Returns with Deductible IRA 

% Returns with Roth IRA 

4,069 3,868 

$8,663 $8,188 

3,500 

$8,139 

122,422 124,771 

3.3%	 3.1% 

2.8% 

Source: U.S. Internal Revenue Service (various issues) 

*Author's calculation from IRS data 

III. Literature Review 

The expansion of eligibility for IRA contributions from 1997 to 1998 is almost 

the direct opposite of the restricting of eligibility for deductible IRA contributions from 

1986 to 1987. As shown in Table 1, virtually all taxpayers were eligible for a deductible 

IRA contribution in 1986, but high-income taxpayers with pensions were prohibited from 

making a deductible IRA contribution beginning in 1987. In the case of IRA 

participation from 1986 to 1987, some researchers (Venti and Wise, 1992, Long, 1990, 

and Bernheim, 1997) attributed the drop-off in IRA participation following TRA86 in 

part to a reduction in the promotion of IRAs.8 Taxpayer confusion over IRA eligibility 

therefore exacerbating the drop-off in IRA participation. Others argued that confusion 

7

 See Congressional Budget Office (2003) for a more detailed analysis of tax-preferred savings programs 
 

for 1997.
 8

 Similar to the case for this study, there is no direct evidence of a drop-off in promotion and advertising of 
 

IRAs from 1986 to 1987 that is publicly available. 
 
5 

over the deductibility restrictions was not important in the drop-off in participation after 

TRA86 since participation did not rebound after 1987 (Engen et al., 1994). While a 

rebound might be expected for a given eligible taxpayer who does not change eligibility 

over time, confusion can persist in the aggregate as taxpayers change eligibility status 

over time due to changes in income or pension status. 

More recent research has gone beyond these observations based on aggregate data 

and examined individual-level data. Hrung (2001) studied a panel of taxpayers using 

public use tax data from 1982-1988 and showed that in 1987, taxpayer confusion over 

IRA eligibility led some taxpayers to refrain from an IRA contribution even when they 

were still eligible for a deductible contribution, but other taxpayers to claim a deductible 

contribution when they likely were not eligible to do so. Overall, taxpayer 

misunderstanding was not found to have been a major factor in the steep drop-off in 

overall IRA contributions after TRA86. That study was hampered by the lack of age and, 

more importantly, pension status information in public use tax data. As a result, 

eligibility for a deductible IRA could not be directly observed and taxpayers could only 

be separated based on modified AGI. 

In a related study, Duflo and Saez (2002) examine peer effects and participation 

in a university tax-preferred savings program. They divide their sample by department 

and find that higher average participation is positively correlated with own participation. 

Their results show that discussion and sharing of information with co-workers can 

increase participation in a tax-preferred savings program. The scope for such information 

sharing for IRAs, which are not organized around the workplace, is likely to be more 

limited. 

IV. Data and Empirical Strategy 

The data for this study comes from a random sample of taxpayers selected from 

the Statistics of Income (SOI) Individual Income Tax Files. The sample for 1997 selects 

all returns with the same two sets of four ending-digits of the Social Security number 

(SSN) for the primary taxpayer. In 1998, along with the expanded eligibility rules for 

IRAs, five sets of SSNs were chosen (the two selected for 1997 plus three other sets) so 

the sample for 1998 is much larger. These randomly drawn returns from the SOI files 

are commonly referred to as the Continuous Work History Survey (CWHS). The dataset 

studied here has advantages over public use tax data in that the age and pension status of 

the taxpayer is available. I am therefore able to determine and select IRA-eligible 

taxpayers in 1997 and 1998. Variable means for the respective years are presented in 

Table 3. 

The sample is further restricted to taxpayers between the ages of 21-69, those with 

earnings, and those filing single, married, or head of household, in the respective year. 

The earnings criterion is necessary since IRA contributions are possible only for those 

with earnings and the age criterion is necessary since contributions to deductible IRAs 

are not allowed after age 70. 

As shown in the top panel of Table 3, the sample for 1997 consists of over 

12,000 tax returns eligible for a deductible IRA contribution. The conditional 

participation rate of 5.6% (Table 3) is greater than the unconditional participation rate of 
6 

3.3% (Table 2). Not surprisingly, the participation rate for those hiring a preparer (6.7%) 

is larger than for those who self-prepare (4.4%). 

Table 3. Variable Means for 

Taxpayers eligible for a deductible contribution in 1997 

and either a deductible or a Roth contribution in 1998 

1997 

Observations 

1(IRA97>0) 

1(Preparer97=1) 

Age 

1(Married=1) 

#Children 

Total Preparer=1 Preparer=0 

12,710 6,569 6,141 

0.056 0.067 0.044 

0.52 1.00 0.00 

38.71 40.68 36.61 

0.36 0.44 0.28 

0.71 0.88 0.53 

Disposable Income (current dollars) $25,590 $29,655 $21,241 

Marginal Tax Rate 0.158 0.162 0.153 

#Supporting Forms 0.51 0.66 0.35 

1998 

Observations 

1(IRA98>0) 

1(Preparer98=1) 

Age 

1(Married=1) 

#Children 

Total Preparer=1 Preparer=0 

42,647 22,982 19,665 

0.067 0.070 0.064 

0.54 1.00 0.00 

40.45 41.68 39.01 

0.45 0.51 0.39 

0.80 0.91 0.66 

Disposable Income (current dollars) $37,041 $39,797 $33,820 

Marginal Tax Rate 0.180 0.181 0.179 

#Supporting Forms 0.45 0.60 0.35 

The bottom panel of Table 3 presents variable means for 1998; note the la rger 

sample size. While Table 2 shows a substantial increase in the IRA participation rate 

from 1997 to 1998, the increase is much more modest when the sample contains only 

eligible taxpayers in each respective year. The participation rate in Table 3 increases 
7 

from 5.6% to 6.7% from 1997 to 1998. Comparing the participation rates for those hiring 

a preparer to self-preparers, there does seem to be some evidence supporting the claim 

that more advertising in 1998 increased IRA participation. The differential in 

participation rates between those hiring a preparer and self-preparers is 0.6 percentage 

points in 1998 whereas it is 2.3 percentage points in 1997. The smaller differential in 

1998 suggests that tax preparers provided less of an information advantage with respect 

to IRAs in 1998 than in 1997. 

Mean Marginal Tax Rates and Disposable Income for the IRA eligible population 

increased from 1997 to 1998, partially because more higher-income taxpayers were 

eligible to make an IRA contribution, particularly for Roth IRAs, in 1998. Some of this 

growth also represents nominal income growth since the values presented are in current 

dollars. 

The empirical strategy for this study will follow Hrung in that the use of a tax 

preparer will proxy for exposure to information regarding IRAs and the relationship 

between the hiring of a tax preparer and IRA participation will be the focus of the 

regressions. Hiring a tax preparer may be endogenous with respect to an IRA 

contribution so I instrument for tax preparer status with the number of supporting forms 

not related to income.9 This follows the strategy used by Erard (1993) in his study of 

preparers and tax evasion. Since a greater number of forms increases the complexity of a 

given return, the number of forms is expected to be related to the decision to hire a tax 

preparer. These forms were chosen because they do not affect the calculation of AGI or 

modified AGI and they are not related to IRA eligibility. And it is unlikely that the 

presence of these forms is directly related to decisions regarding IRAs. For example, 

neither the dependent care credit (Form 2441) nor the Alternative Minimum Tax (Form 

6251) have any obvious direct connection to a taxpayer’s retirement savings decisions. 

Therefore, I assume that the number of supporting forms not related to income does not 

directly affect IRA participation, after controlling for tax preparer status. 

I will present linear and non-linear regression results. The linear estimation will 

occur in two steps (a standard Two-Stage Least Squares (2SLS) estimation). First, a 

linear probability model will be estimated to produce a predicted value for the hiring of a 

preparer: 

1(Prepareri=1) = Xi? +d*#formsi+?i ; 

E[?i | Xi, #formsi]=0 

Then, this predicted value will be substituted for actual Preparer status in the 

second stage:10 

1(IRAi>0)=Xiß+ßp*(Pred. Prepareri) + ei ; 

E[ei | Xi, Pred. Prepareri]=0 

9

 The forms and schedules comprising this measure are Forms 1116 (Foreign Tax Credit), 2441 (Child and 

Dependent Care Credit), 3800 (General Business Credit), 4137 (Social Security and Medicare tax on 

unreported tip income), 4868 (Extension to File), 5329 (Additional Taxes on Qualified Plans), 6251 

(Alternative Minimum Tax), 8396 (Mortgage Interest Credit), 8801 (Credit for Prior-Year Minimum Tax), 

8812 (Additional Child Credit), 8839 (Adoption Credit), and Schedules SE (Self-Employment Tax), R 

(Credit for the Elderly or Disabled), H (Household Employment taxes), and EIC (Earned Income Credit). 

10 The standard errors in the second stage are appropriately adjusted for first stage estimation. 
8
 

where the dependent variable will represent a deductible IRA contribution in 1997, and 

either a deductible or Roth IRA contribution in 1998. I will not investigate Roth and 

deductible contributions separately since many taxpayers were eligible to contribute to 

both (see Tables 5 and 6). The choice between Roth and deductible IRAs for those 

eligible for both will be the subject of future research. Xi contains the Marginal Tax 

Rate, log(Disposable Income), Age, Marital Status, and Number of Children. The 

Marginal Tax Rate is defined as the tax rate faced by the taxpayer prior to any deductible 

IRA contribution and Disposable Income is total income minus taxes assuming no 

deductible IRA contribution. The focus of this study is the estimate of ßp. 

I will also present Non-linear Instrumental Variables (IV) results where the 

“second stage” is a probit model instead of a linear probability model.11 Separate crosssectional regressions will be estimated for 1997 and 1998, and the sample will only 

include taxpayers eligible for a deductible IRA contribution in 1997, or taxpayers eligible 

for a deductible or Roth IRA contribution in 1998.12 

In separate cross-sectional analyses, it is theoretically ambiguous whether the 

Preparer coefficient, ßp, should be greater in 1997 or 1998. If the only relevant change 

for IRAs from 1997 to 1998 was increased advertising of IRAs, then the Preparer 

coefficient would be expected to be smaller in 1998 than in 1997. This is because more 

taxpayers would have been aware of IRAs in 1998 due to increased advertising and 

taxpayers with a preparer would have little informational advantage over self-preparers 

with respect to IRAs. That is, a preparer would have less influence in 1998 on the 

decision to contribute to an IRA. 

However, Roth IRAs were introduced in 1998 and they expanded eligibility for an 

IRA contribution based only on income and not pension status. In addition, the income 

limits for deductible IRAs were also expanded. The different rules may have confused 

taxpayers as to their eligibility, particularly those newly eligible. Therefore, a preparer 

may have a greater influence in 1998 on the decision to contribute to an IRA (deductible 

or Roth) than in 1997. 

Since the two CWHS-endings for SSNs that were chosen for 1997 were also 

among the five selected for 1998, I am able to create a panel. However, with only two 

years of data, I am unable to use non-linear panel data techniques to control for 

unobserved heterogeneity. The fixed-effects logit model (Chamberlain, 1984) is 

inappropriate because it constrains coefficients to be equal across time and relies on 

variation in the dependent variable to control for the unobserved fixed effect. 

Unfortunately, only 4.4% of the returns eligible for an IRA contribution in both years 

contributed to an IRA in only one year. 

The correlated random effects model (Chamberlain, 1982, 1984) allows 

coefficients to vary over time. For this model, the number of degrees of freedom depends 

on the number of years in the panel, not the number of observations. With only two years 

of data being studied, there are insufficient degrees of freedom for the specification 

11 See Davidson and MacKinnon (1993) for why it is incorrect to think of Non-linear IV estimation as 
 

occurring in two steps (p. 224-5).
 12 I do not consider non-deductible IRA contributions since all taxpayers were eligible to make a non-
 

deductible IRA contribution after 1987 and participation rates for non-deductible IRAs are very low. In 
 

1998, less than 1 million taxpayers contributed to a non-deductible IRA.
 
9 

required for this study. The Appendix provides a more detailed explanation. Instead, the 

panel aspect of the data will be exploited to create sub-samples based on eligibility across 

1997 and 1998. The analysis will remain cross-sectional and instrumental variables will 

continue to be used to control for the endogeneity of hiring a tax preparer. 

As there were two changes relevant to this study from 1997 to 1998, the increase 

in IRA advertising and the expansion in IRA eligibility, splitting the data into subsamples is an attempt to isolate the advertising effect. By examining taxpayers eligible to 

contribute to an IRA in both years, any difference in the Preparer coefficient from 1997 

to 1998 can likely be attributed to advertising and not the expansion in IRA eligibility. 

For these taxpayers, increased advertising in 1998 should lead to a smaller Preparer 

coefficient in 1998. It is more difficult to speculate for newly eligible taxpayers in 1998. 

Increased advertising and increased confusion due to IRA eligibility expansion run 

counter to each other in terms of an expected Preparer coefficient. 

I focus primarily on the IRA participation decision since I find that most 

contributors contribute at least $2,000 to their IRAs. For example, in 1998, for returns 

with a deductible or Roth IRA contribution, around three-fourths contributed at least 

$2,000. Also, the different contribution limits for married and non-married taxpayers, as 

well as taxpayers facing a phase-out of their contribution limit complicates any analysis 

of contribution amounts. Nevertheless, I will also present 2SLS results where the 

dependent variable is the amount contributed to an IRA, conditional on a positive 

contribution. These results will give a sense of the dollar magnitude of the relationship 

between preparers and IRAs. 

V. Results 

The first set of results in Table 4 are for the 1997 cross-section by itself with no 

linking to the 1998 data. In column (1), I present the first-stage results where preparer 

status is regressed against the other independent variables and the number of supporting 

forms. The second column presents the second-stage results. They suggest that hiring a 

preparer leads to a 9.2 ± 4 percentage point increase in the probability of contributing to 

an IRA in 1997. The Preparer coefficient is significant at the 95% confidence level. The 

Marginal Tax Rate and Disposable Income both have a positive influence on IRA 

participation, while the Number of Children negatively influences IRA participation. 

Probit IV results are presented in column (3) of Table 4. In general, the marginal 

effects are smaller than the 2SLS coefficients. The difference is not surprising since as a 

rough rule of thumb, a linear probability model gives similar results to a probit model 

only when the mean of the dependent variable is close to 0.5. Here, the mean of the 

dependent variable is only 0.056, so the Probit IV results are preferred and I will focus 

mainly on the Probit IV results.13 These results suggest that hiring a preparer increases 

the probability of contributing to an IRA by 4.3 ± 4 percentage points and the Preparer 

coefficient is statistically significant. So despite the fact that IRA eligibility rules 

remained basically constant from 1987 to 1997, I still find that hiring a preparer increases 

the probability of contributing to an IRA in 1997. This may not be surprising considering 

that younger taxpayers may not be fully aware of IRAs as they enter the taxpaying 

13 The main criticism of the linear probability model is that predicted values of the dependent variable can 

lie outside the (0,1) interval. 
---- ----

---- ----

10 

population and that taxpayers may change eligibility status over time due to changes in 

income or pension status.14 A simple calculation suggests that IRA participation would 

have increased by around 2 percentage points for the sample if all taxpayers had hired a 

tax preparer. 

Table 4. Regression Results (standard errors in parentheses) 

Marginal Effects Presented, Dependent Variable: 1(IRA>0) in Respective Year 

1997 1998 

1(Preparer=1)
 

Marginal Tax Rate
 

1(Married=1)
 

Age
 

Age Squared
 

# Children
 

log(Disposable Income)
 

# Supporting Forms
 

obs.
 

First-Stage 2SLS Probit IV First-Stage 2SLS Probit IV 

0.092 0.043 0.110 0.092 

(0.02) (0.02) (0.01) (0.02) 

-0.219 0.08 0.05 -0.292 0.05 0.02 

(0.06) (0.03) (0.03) (0.03) (0.02) (0.02) 

0.05 -0.0014 -0.003 0.04 0.008 0.002 

(0.01) (0.01) (0.004) (0.01) (0.003) (0.003) 

-0.0713 -0.017 0.019 -0.0827 -0.0066 0.0023 

(0.02) (0.01) (0.01) (0.01) (0.01) (0.01) 

0.014 0.0036 -0.001 0.0146 0.0014 0.0002 

(0.003) (0.001) (0.001) (0.002) (0.001) (0.001) 

0.3680 -0.20 -0.13 0.0191 -0.02 -0.02 

(0.05) (0.03) (0.03) (0.003) (0.002) (0.002) 

0.06 0.040 0.04 0.06 0.033 0.04 

(0.01) (0.003) (0.004) (0.004) (0.002) (0.003) 

0.167 0.148 

(0.01) (0.004) 

12,710 42,647 

Mean of Dependent Variable 5.6% 6.7% 

% Roth 3.3% 

% Deductible 3.4% 

Columns (4) - (6) present the corresponding results for 1998. The Probit IV 

results suggest that hiring a preparer increases the probability of contributing to an IRA 

by 9.2 ± 4 percentage points. The estimated Preparer coefficient in 1998 is larger than in 

1997, in absolute value and relative to the mean of the dependent variable. While this 

result is not consistent with the hypothesis that increased advertising of IRAs increased 

participation in 1998 relative to 1997, examining different sub-samples will provide a 

cleaner test of the hypothesis. 

As noted above, the panel aspect of the data is exploited to examine sub-samples 

of the data and I continue to control for the endogeneity of preparer status through 

instrumental variables. The total sample size of returns that I observe in both 1997 and 

1998 is 14,712. This sample contains returns eligible for a Roth or deductible IRA 

contribution in 1998 and returns which may or may not have been eligible for a 

deductible IRA contribution in 1997.15 

I first examine taxpayers who were eligible to contribute to an IRA in both 1997 

and 1998. Confusion over IRA eligibility should be relatively constant for these 

taxpayers so examining this group should provide a cleaner test of the hypothesis that 

increased advertising led to increased IRA participation in 1998. The sample here is 

14 I find that 12% of returns eligible for a deductible IRA contribution in 1997 would not have been eligible 
 

for a deductible IRA contribution in 1998 based on 1997 rules.
 15 Hence the larger sample size than in Tables 3 and 4 for only returns eligible for a 1997 deductible IRA 
 

contribution.
 
11 

slightly smaller than the cross-sectional sample for 1997 primarily due to the restriction 

that marital status remain constant from 1997 to 1998. Table 5 shows that IRA 

participation for this group did increase from 5.7% in 1997 to 6.9% in 1998. This is 

consistent with some eligible non-contributors in 1997 beginning contributions in 1998 

due to increased promotion and advertising of IRAs in 1998. 

Table 5. Regression Results (standard errors in parentheses) 

Marginal Effects Presented, Dependent Variable: 1(IRA>0) in Respective Year 

1997 1998 

ELIGIBLE IN 1997 AND 1998 2SLS Probit IV 2SLS Probit IV 

1(Preparer=1) 0.074 0.062 0.071 0.046 

(0.024) (0.03) (0.027) (0.03) 

obs. 10,400 10,400 

Mean of Dependent Variable 5.7% 6.9% 

% Roth 2.2% 

% Deductible 4.7% 

% eligible only for Roth IRA 23.1% 

% eligible only for Deductible IRA 0.6% 

% eligible for Both 76.3% 

Other coefficients not presented to conserve space 

In Table 5, the Probit IV results show that for taxpayers eligible for an IRA 

contribution in both 1997 and 1998, hiring a preparer increases the probability of 

contributing to an IRA by 6.2 ± 6 percentage points in 1997. In 1998, more than threequarters of this sample was eligible for both a deductible and a Roth IRA while around a 

quarter of the sample was eligible only for a Roth IRA. For 1998, two-thirds of IRA 

participants contributed to a deductible IRA instead of a Roth IRA. The Probit IV results 

show that hiring a preparer in 1998 increases the probability of contributing to an IRA by 

4.6 ± 6 percentage points. For this sub-sample, the influence of a preparer is smaller in 

1998 than in 1997 in both magnitude and statistical significance. So when taxpayers 

eligible for an IRA contribution in both years are examined, the results are consistent 

with the expectation that a preparer would have less of an influence on IRA participation 

in 1998 because increased advertising had already made taxpayers more aware of IRAs. 

Without a more direct measure of advertising, it is difficult to rule out other 

possible interpretations of these results. For example, for this sub-sample of taxpayers 

eligible for an IRA contribution in both years, a preparer may have less influence in 1998 

because of the natural accumulation of information regarding IRAs over time, rather than 

because of any increase in advertising of IRAs.16 A finding that more advertising did not 

increase IRA participation in 1998 for this group would support this alternative 

interpretation. 

16 As noted earlier, a smaller influence of preparers on IRA participation over time is not expected for 

separate cross-sections or in the aggregate due to younger taxpayers and taxpayers changing IRA eligibility 

status over time. 
12
 

Table 6. Regression Results (standard errors in parentheses) 

Marginal Effects Presented, Dependent Variable: 1(IRA>0) in 1998 

ELIGIBLE only in 1998 

1(Preparer98=1) 

obs.
 

Mean of Dependent Variable
 

% Roth
 

% Deductible
 

% eligible only for Roth IRA
 

% eligible only for Deductible IRA
 

% eligible for Both
 

2SLS Probit IV 

0.165 0.245 

(0.06) (0.30) 

4,312 

9.1% 

6.8% 

2.2% 

50.6% 

0.9% 

48.5% 

ELIGIBLE IN 1998 

(regardless of 1997 status) 

1(Preparer98=1) 

obs.
 

Mean of Dependent Variable
 

% Roth
 

% Deductible
 

2SLS Probit IV 

0.092 0.084 

(0.02) (0.032) 

14,712 

7.6% 

3.6% 

4.0% 

Other coefficients not presented to conserve space 

The first panel in Table 6 presents results for taxpayers who were newly eligible 

to contribute to an IRA in 1998. Here, more than half of the sample was eligible only for 

a Roth IRA while less than half of the sample was eligible for both types of IRAs. The 

participation rate of 9.1% for this sub-sample is larger than the participation rate of 6.9% 

in 1998 for taxpayers who were also eligible to make an IRA contribution in 1997. For 

these newly eligible taxpayers, more than two-thirds of IRA contributors contributed to a 

Roth IRA instead of a deductible IRA. For the newly eligible sample, I find that hiring a 

preparer increases the estimated probability of contributing to an IRA by 24.5 ± 60 

percentage points. This is consistent with these taxpayers being confused by the new 

eligibility rules and therefore, hiring a preparer increases the probability of contributing 

to an IRA quite substantially. However, the Preparer coefficient is not significant at any 

reasonable confidence level. The larger cross-sectional Preparer coefficient for 1998 
13 

relative to 1997, which was reported in Table 4, is likely driven by this sub-sample. This 

is also shown in the last panel of Table 6 where the sample contains returns eligible for a 

Roth or deductible IRA in 1998 regardless of eligibility in 1997. 

Table 7. 2SLS Regression Results (standard errors in parentheses) 

Dependent Variable: IRA Contribution Amount in Respective Year, 

Inclusion in Sample is Conditional on IRA Participation 

ELIGIBLE IN 1997 AND 1998 ELIGIBLE only in 1998 

1997 1998 1998 

1(Preparer=1) 1,905.8 427.3 9,674.1 

(653.04) (398.53) (39,171) 

obs. 590 720 391 

Mean of Dependent Variable $2,145 $2,128 $2,473 

Other coefficients not presented to conserve space 

Table 7 presents 2SLS results where the dependent variable is the amount 

contributed to an IRA. Since I condition on positive IRA contributions, the sample size 

differs in 1997 and 1998 even for the sample that is eligible for a contribution in both 

years. The results in Table 7 are similar to those found in Tables 5 and 6 in that the 

Preparer coefficient is positive and statistically significant in 1997, but not in 1998 for 

either sample.17 The magnitude of the Preparer coefficient in 1998 for those newly 

eligible in 1998 is quite large, but the coefficient is not significant at any reasonable 

level. 

VI. Conclusion 

This paper has sought to study the claim that the increase in total IRA 

contributions from 1997 to 1998 can be at least partially attributed to increased 

advertising and promotion due to the introduction of Roth IRAs in 1998. I use the hiring 

of a tax preparer to proxy for exposure to information regarding IRAs. If increased 

advertising of IRAs led to increased IRA participation in 1998, the impact of hiring a 

preparer should be smaller in 1998 than in 1997. Complicating the analysis is the fact 

that eligibility rules for deductible IRAs were also expanded in 1998 and Roth IRAs were 

introduced, which likely led to increased confusion regarding IRA eligibility. 

First, I find that hiring a preparer would have increased IRA participation in 1997 

despite the fact that the eligibility rules for deductible IRAs remained basically 

unchanged from 1987 to 1997. Secondly, I find that for taxpayers who were eligible to 

make an IRA contribution in both 1997 and 1998, hiring a tax preparer had more of an 

impact in 1997 than in 1998. This includes the IRA participation decision as well as the 

decision of how much to contribute. This is consistent with the notion that increased 

advertising surrounding the introduction of Roth IRAs in 1998 reduced the informational 

advantage regarding IRAs for those hiring a preparer relative to 1997. However, I also 

17 The contribution limit for married taxpayers is double that of non-married taxpayers. When the 1997 

sample is split into married and non-married sub-samples, the preparer coefficient (standard error/sample 

size) takes on the values $2,671 (1,331/268) and $830 (446/322), respectively. 
14 

find that, for taxpayers newly eligible for an IRA contribution in 1998, despite the 

increased advertising of IRAs in 1998, there rema ined potential opportunities to increase 

participation and contributions through increased awareness of IRAs. For future work, a 

more refined analysis will require more direct measures of exposure to advertising and 

measures of taxpayer confusion over IRA eligibility. 
15
 

APPENDIX 

Correlated Random Effects 

A method that allows for correlation between an unobserved individual effect and 

the explanatory variables is the correlated random effects (CRE) model (Chamberlain, 

1982, 1984). The unobserved individual component is treated as random, but it is still 

allowed to be correlated with the regressors. While the probit case is slightly more 

complicated, a linear probability example will be sufficient to illustrate why the CRE 

model would not be appropriate for this study. 

The CRE model is estimated in two steps. First the dependent variable in each 

year is regressed on all leads and lags of the explanatory variables. Then, restrictions are 

imposed on the matrix of coefficients; these restrictions can be tested. 

Consider the following simple relationship between contributing to an IRA and 

hiring a tax preparer for person i in year t : 

IRAit = ?tai + ßtPreparerit + eit (1) 

where IRAit is a dummy variable taking on the value of 1 if taxpayer i made an IRA 

contribution in year t and zero otherwise, Preparerit is a dummy variable taking on the 

value of 1 if a preparer was hired by taxpayer i in year t and zero otherwise, ai is an 

unobserved individual effect which may be correlated with Preparerit, and eit is a random 

error term. 

Note that the model in equation (1) is very general in that there are coefficients 

for the individual effects which vary over time (gt) and the coefficients for the Preparer 

variable are allowed to vary through time (bt).18 

If the individual effects are correlated with the Preparer variable at a point in time, 

they are likely to be correlated with the Preparer variable at all points in time. So for T 

time periods, 

ai = ?1Prepareri1 + ... + ?T PrepareriT + ui = ?’Prepareri + ui (2) 

where ui is uncorrelated with the Preparer variable. Substituting the above expression 

into equation (1), the following is obtained: 

IRAit = ßtPreparerit + ?t?’Prepareri + (?tui + eit) (3) 

Therefore the first step of the CRE model would regress the IRA dummy variable in each 

year on all values of the Preparer variable. The unrestricted model against which the 

restrictions will be imposed in the second step is typically expressed as follows: 

IRAi = ? Prepareri + ei (4) 

18 In a typical application of the standard individual effects model, the gts are assumed to all equal 1, and 

the bts do not vary over time. 
16
 

where IRAi is the vector of the IRA dummy for person i over the sample period. The P 

matrix will have the following form for the sample in this study where T=2: 

P = 

o 

Ø

Œ 

b1 

g 

+ 

2l

g 

1

1

l1 

b2 

g 

+ 

1

l

g 

2

2l2 ß

œ 

ø 

Once the unrestricted P matrix is estimated, the various restrictions on the 

parameters are imposed via a minimum distance estimator using the variance/covariance 

matrix for the P coefficients as the optimal weighting matrix. A test of the overidentifying restrictions will tell whether or not a particular specification can be rejected at 

standard confidence levels. 

The specific issue for this study is that with only two time periods, there are only 

4 (2 x 2) coefficients/degrees of freedom upon which to impose restrictions on six 

parameters (two ßs/two ?s/two gs). The degrees of freedom for the second stage only 

depend on the size of the P matrix, not the total number of observations. So if the 

Preparer coefficients are allowed to vary across the two years, there remain two degrees 

of freedom and four remaining parameters (two ?s and two gs), and only a very restrictive 

model is possible (e.g., all ?s and gs assumed/restricted to be a constant). 

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