Tax uncertainty and retirement savings diversification

David C. Brown, Scott H Cederburg, Michael S. O'Doherty

Research output: Contribution to journalArticle

3 Scopus citations

Abstract

We investigate the optimal savings decisions for investors with access to pre-tax (traditional) and post-tax (Roth) versions of tax-advantaged retirement accounts. The model features a progressive tax schedule and uncertainty over future tax rates. Traditional accounts are valuable for hedging retirement account performance and managing current income near tax-bracket cutoffs, whereas Roth accounts allow investors to mitigate uncertainty over future tax schedules. The optimal asset location policy for most households involves diversifying between traditional and Roth vehicles. Contrary to conventional advice, the substantial economic benefits from Roth investments are not limited to investors with low current income.

Original languageEnglish (US)
JournalJournal of Financial Economics
DOIs
StateAccepted/In press - 2017

Keywords

  • Asset location
  • IRA
  • Retirement savings
  • Roth
  • Tax uncertainty

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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