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Optimal Savings with Taxable and Tax-Deferred Accounts

  • Francisco Gomes

    (London Business School)

  • Alexander Michaelides

    (London School of Economics)

  • Valery Polkovnichenko

    (University of Texas, Dallas)

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)

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File URL: http://dx.doi.org/10.1016/j.red.2009.01.004
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Article provided by Elsevier for the Society for Economic Dynamics in its journal Review of Economic Dynamics.

Volume (Year): 12 (2009)
Issue (Month): 4 (October)
Pages: 718-735

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Handle: RePEc:red:issued:07-198
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