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Optimal Savings with Taxable and Tax-Deferred Accounts

Author

Listed:
  • Francisco Gomes

    (London Business School)

  • Alexander Michaelides

    (London School of Economics)

  • Valery Polkovnichenko

    (University of Texas, Dallas)

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. (Copyright: Elsevier)

Suggested Citation

  • Francisco Gomes & Alexander Michaelides & Valery Polkovnichenko, 2009. "Optimal Savings with Taxable and Tax-Deferred Accounts," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 12(4), pages 718-735, October.
  • Handle: RePEc:red:issued:07-198
    DOI: 10.1016/j.red.2009.01.004
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    References listed on IDEAS

    as
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    More about this item

    Keywords

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

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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