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Wealth accumulation and portfolio choice with taxable and tax-deferred accounts

By Francisco Gomes, Alexander Michaelides and Valery Polkovnichenko

Abstract

We calibrate a life-cycle model with uninsurable labour income risk and borrowing constraints to match wealth accumulation and portfolio allocation profiles of direct and indirect stockholders in both taxable and tax-deferred accounts. Tax-deferred accounts generate an increase in wealth accumulation that is larger for wealthier households. Furthermore, while the cost of following a fixed contribution rate over the life cycle is small, the optimal rate can differ substantially across households, and the welfare losses from choosing the wrong one can be substantial. Finally, the welfare gain from having access to a tax-deferred account ranges from less than 0.1% to 11.5%, depending on the preference parameters

Topics: HG Finance
Publisher: Centre for Economic Policy Research
Year: 2005
OAI identifier: oai:eprints.lse.ac.uk:5362
Provided by: LSE Research Online
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