Abstract
This paper analyzes the effects of tax-deferred accounts (TDAs) in a stochastic life-cycle model. The simulations reveal that conventional savings (CSAs) serve mainly for liquidity and TDAs for retirement and bequests. The tax incentives are generally effective in stimulating new savings for the middle and upper income groups. TDAs facilitates wealth accumulation, which perhaps unintentionally encourages earlier retirement. TDAs fail to induce new savings and affect the retirement choice for impatient and low-income individuals since they face lower marginal tax rates and have limited resources to take advantage of TDAs. They tend to retire and claim Social Security early.
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