Taxation and Household Financial Behavior

National Bureau Of Economic Research Inc, Cambridge MA

Investigators

Abstract

This project will study how tax incentives affect the structure of household portfolios. One strand of research will explore the determinants of asset allocation patterns in tax-deferred and taxable accounts. The recent growth of employee participation in 401(k) plans, and the coincident expansion in the number of households with Individual Retirement Accounts, has raised new portfolio choices for many households. This research will investigate the extent to which households consider tax factors in structuring their portfolios by comparing asset allocation decisions in taxable and tax-deferred settings. It will also develop new information on the potential distribution of balances in tax-deferred accounts when current savers reach retirement. The research will bear on the ongoing discussion concerning the adequacy of household retirement saving and thus will have broader impacts on both the financial and the public policy sectors. A second strand of research will explore the recent growth of variable annuity products. It will evaluate how tax incentives affect the demand for these financial products, and test the hypothesis that the households with the largest incentives to hold variable annuities purchase these products. This research will also consider the potential role of these products in helping retirees to draw down the balances that they accumulate in 401(k) plans and other retirement saving vehicles.