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Optimal savings with taxable and tax-deferred accounts

Journal

Review of Economic Dynamics

Subject

Finance

Authors / Editors

Gomes F;Michaelides A;Polkovnichenko V

Biographies

Publication Year

2009

Abstract

We solve and estimate a life-cycle model with earnings risk and liquidity constraints in the presence of tax-deferred retirement accounts (TDAs). We explicitly consider two very different types of households (with TDAs): direct and indirect stockholders. The latter hold stocks only through TDAs and, consistent with the data, save considerably less than the former, who hold stocks both inside and outside these accounts. We find that TDAs promote higher wealth accumulation but only marginally higher net savings. Consumption increases mostly during retirement, as desired, but the effect is largest for those households with higher savings rates already.

Keywords

Tax-deferred accounts; Retirement savings; Liquidity constraints; Portfolio choice; Uninsurable earnings risk

Publication Research Centre

Institute of Finance and Accounting

Available on ECCH

No


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