Housing and Tax-Deferred Retirement Accounts

By Anson T. Y. Ho and Jie Zhou


Assets in tax-deferred retirement accounts (TDA) and housing are two major components of household portfolios. In this paper, we develop a life-cycle model to examine the interaction between households’ use of TDA and their housing decisions. The model generates life-cycle patterns of home ownership and the composition of net worth that are broadly consistent with the data from the Survey of Consumer Finances. We find that TDA promotes home ownership, as households take advantage of the preferential tax treatments for both TDA and home ownership. They substitute TDA assets for home equity by accumulating wealth in TDA and making smaller down payments (taking out bigger mortgages); consequently, they become homeowners earlier in their lives. On the other hand, housing-related policies, such as a minimum down payment requirement and mortgage interest deductibility, affect households’ housing decisions more than their use of TDA.

It is no mystery that savings decisions are complex. The authors here address jointly two important savings motives, and they show that they should not be studied separately. This means that looking the impact of policy changes has now become more complex. For example, a simplification of the various TDAs offered in the US will likely have an impact on homeownership. Unfortunately, this means that such studies will need heavy artillery in terms of computing power.


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