Tax uncertainty and retirement savings diversification

Tax-Preferred Savings Vehicles: Can Financial Education Improve Asset Location Decisions?

“…4 It is easy to show that back-and front-loaded savings vehicles generate the same consumption when marginal tax rates are equal at the time of contribution and the time of withdrawal. 5 However, when tax rates are not equal at these two time points, contributing to the wrong type of tax-preferred account can produce large losses, especially for individuals whose contribution and/or retirement income takes them close to a kink in the progressiveness of the tax schedule (Brown et al, 2017). 6 2 We follow the wording of Holzmann and Hinz (2005), Landoni and Zeldes (2018) and others where front-and back-loaded refer to the timing of the taxation of cash flows.…”

“…3 In the United States, Brown et al (2017) report assets of 14 trillion USD in tax-preferred retirement vehicles. In 2019, tax-preferred assets were estimated to be worth upward of 18 trillion USD (www.ici.org/research/stats/retirement/ret_19_q2).…”

“…8 A substantial strand of the literature has studied whether individuals save optimally through tax-preferred vehicles (Burman et al, 2001, Gomes et al, 2009, Zhou, 2012, Burman et al, 2001, Dammon et al, 2004, Shoven and Sialm, 2004, Huang, 2008, Brown et al, 2017 For example, Clark et al (2017) find that workers with higher levels of financial literacy achieve higher annual returns on their 401(k) accounts, whereas Lusardi et al (2017) show that these differences can be generated endogenously through the accumulation of financial knowledge.…”

Very Last Thoughts

“…But, for those readers who are interested in pursuing and/or reading more about this embryonic area of research, namely the overlap of retirement income optimization and tax uncertainty, see the articles cited as [ 4 , 8 , 14 ] and [ 12 ] and the references therein.…”

Tax-Sheltered Retirement Accounts: Can Financial Education Improve Decisions?

“…In a Canadian context,Milligan (2002) andVeall (2001) investigate how marginal tax rates affect the take-up of back-loaded savings accounts.5Brown et al (2017) considers the case where marginal tax rates in retirement are uncertain.…”