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Portfolio choice in tax-deferred and Roth-type savings accounts

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  • Richard Johnson
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    Abstract

    This paper uses numerical methods to compare optimal portfolios in tax-deferred and Roth-type savings accounts. Income and payroll taxes affect optimal portfolios in tax-deferred and Roth-type plans differently. For workers with assets in only one type of plan, the optimal equity share in a tax-deferred account could be higher or lower than in a Roth, depending on initial wealth. The differences in optimal portfolios between plans are large at short investment horizons but smaller at longer horizons. This paper also studies the 'asset location' decision of workers with assets in plans of both types.

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    File URL: http://www.kc.frb.org/Publicat/Reswkpap/pdf/RWP03-08.pdf
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    Bibliographic Info

    Paper provided by Federal Reserve Bank of Kansas City in its series Research Working Paper with number RWP 03-08.

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    Date of creation: 2003
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    Handle: RePEc:fip:fedkrw:rwp03-08

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    Related research

    Keywords: Individual retirement accounts ; Retirement ; 401(k) plans;

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    References

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    1. Shoven, John B. & Sialm, Clemens, 2004. "Asset location in tax-deferred and conventional savings accounts," Journal of Public Economics, Elsevier, vol. 88(1-2), pages 23-38, January.
    2. John Y. Campbell & Joao F. Cocco & Francisco J. Gomes & Pascal J. Maenhout, 1999. "Investing Retirement Wealth: A Life-Cycle Model," NBER Working Papers 7029, National Bureau of Economic Research, Inc.
    3. Feldstein, Martin & Liebman, Jeffrey B., 2002. "Social security," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 32, pages 2245-2324 Elsevier.
    4. Samuelson, Paul A, 1969. "Lifetime Portfolio Selection by Dynamic Stochastic Programming," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 239-46, August.
    5. Zvi Bodie & Robert C. Merton & William F. Samuelson, 1992. "Labor Supply Flexibility and Portfolio Choice in a Life-Cycle Model," NBER Working Papers 3954, National Bureau of Economic Research, Inc.
    6. Smetters, Kent, 2002. "Controlling the cost of minimum benefit guarantees in public pension conversions," Journal of Pension Economics and Finance, Cambridge University Press, vol. 1(01), pages 9-33, March.
    7. James M. Poterba & John B. Shoven & Clemens Sialm, 2000. "Asset Location for Retirement Savers," NBER Working Papers 7991, National Bureau of Economic Research, Inc.
    8. Jagadeesh Gokhale & Laurence J. Kotlikoff, 2001. "Who gets paid to save?," Working Paper 0114, Federal Reserve Bank of Cleveland.
      • Jagadeesh Gokhale & Laurence J. Kotlikoff, 2003. "Who Gets Paid to Save?," NBER Chapters, in: Tax Policy and the Economy, Volume 17, pages 111-140 National Bureau of Economic Research, Inc.
    9. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-57, August.
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