Tax uncertainty and retirement savings diversification

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

Research output: Contribution to journalArticle

1 Citation (Scopus)

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

Fingerprint

Diversification
Tax
Uncertainty
Retirement saving
Investors
Schedule
Income
Retirement
Hedging
Savings
Assets
Tax rate
Economic benefits
Progressive taxes
Household

Keywords

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

ASJC Scopus subject areas

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

Cite this

Tax uncertainty and retirement savings diversification. / Brown, David C.; Cederburg, Scott H; O'Doherty, Michael S.

In: Journal of Financial Economics, 2017.

Research output: Contribution to journalArticle

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