Valuing Assets in Retirement Saving Accounts

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Assets in retirement saving plans have become an important component of net worth for many households. While many studies compare household balances in tax-deferred retirement accounts such as 401(k) plans with the financial assets held outside these accounts, these different asset components are not directly comparable. Taxes and in some cases penalties are due when assets are withdrawn from some retirement saving plans. These factors can make a dollar held inside a retirement account less valuable than a dollar held in a similar asset outside these accounts, particularly for those who are considering withdrawing assets from the tax-deferred accounts in the near future. For younger households who do not plan to withdraw tax deferred assets for many years, the opportunity for tax-free compound returns in retirement accounts can make a dollar inside such an account more valuable than a dollar outside such accounts from the standpoint of providing retirement resources, even though the principal from the retirement account will be taxed at the time of distribution, while the principal outside such accounts is untaxed. This paper illustrates the potential differences in the value of a dollar of invested in a bond, or in corporate stock, inside and outside tax-deferred accounts. It draws on a range of data sources to calibrate the value of the tax burden, and the benefit of compound growth, for assets held in retirement accounts, and describes the differences in relative valuation for households of different ages.