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Does participating in a 401(k) raise your lifetime taxes?

Author

Listed:
  • Jagadeesh Gokhale
  • Laurence J. Kotlikoff
  • Todd Neumann

Abstract

Contributing to 401(k)-type plans lowers current taxes, but does it lower lifetime taxes? If tax rates were independent of income and remained constant through time, the answer would be an unambiguous “yes.” But tax rates may be higher when retirement account withdrawals occur, either because one moves into higher marginal tax brackets or because the government raises tax rates. Moreover, reducing tax brackets when young in exchange for higher tax brackets when old renders mortgage deductions less valuable. Most importantly, shifting taxable income from youth to old age can substantially increase the share of Social Security benefits subject to federal income taxation. This paper studies the lifetime tax advantage gained from participating in 401(k) plans for stylized households. It finds that participation may increase lifetime taxes and reduce lifetime spending for low- and moderate-income households. In contrast, high-income households stand to derive significant lifetime spending gains from participating.

Suggested Citation

  • Jagadeesh Gokhale & Laurence J. Kotlikoff & Todd Neumann, 2001. "Does participating in a 401(k) raise your lifetime taxes?," Working Paper 0108, Federal Reserve Bank of Cleveland.
  • Handle: RePEc:fip:fedcwp:0108
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    References listed on IDEAS

    as
    1. Jagadeesh Gokhale & Laurence J. Kotlikoff & Mark J. Warshawsky, 2001. "Life-cycle saving, limits on contributions to DC pension plans, and lifetime tax benefits," Working Paper 0102, Federal Reserve Bank of Cleveland.
    2. James M. Poterba & Steven F. Venti, 2004. "The Transition to Personal Accounts and Increasing Retirement Wealth: Macro- and Microevidence," NBER Chapters,in: Perspectives on the Economics of Aging, pages 17-80 National Bureau of Economic Research, Inc.
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    Cited by:

    1. Hurst, Erik & Willen, Paul, 2007. "Social security and unsecured debt," Journal of Public Economics, Elsevier, vol. 91(7-8), pages 1273-1297, August.
    2. 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.

    More about this item

    Keywords

    Income tax;

    JEL classification:

    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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