Tax on Capital - PAM2040 TaxesonSavings,RiskTakingand Wealth theTaxCode DefinedBenefit Benefit=f(tenure,wage DefinedContribution

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PAM 2040 Taxes on Savings, Risk Taking and  Wealth
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Encouraging Retirement Savings with  the Tax Code Pension Plans – pre-tax income Defined Benefit Benefit = f(tenure, wage) Defined Contribution Contribution = f(wage)
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Encouraging Retirement Savings with  the Tax Code 401(k) – pre - tax dollars Maximum contribution / year (~$15,100) Taken out of each paycheck Matched by employer
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Encouraging Retirement Savings with  the Tax Code Individual Retirement Accounts (IRAs) Personally contribute $4000 / year Pre-tax dollars Must withdraw at 59.5 – 70 years old Withdrawals ( distributions)  taxed at appropriate mtr 
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Encouraging Retirement Savings with  the Tax Code Roth IRAs Invest with after-tax dollars Distributions not taxed No withdrawal schedule When would you want to invest in Roth IRA? Get to “choose” tax rate  ρτ   net tax preference  ρ  <1 
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Benefit of IRAs
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Theoretical behavioral effects –  IRA Contribution Limit
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Pension Plan 401k IRA Roth IRA Savings Account Which would a Precautionary Saver Choose? What about someone seeking to avoid liquidity 
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This document was uploaded on 10/26/2011 for the course PAM 2040 at Cornell University (Engineering School).

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Tax on Capital - PAM2040 TaxesonSavings,RiskTakingand Wealth theTaxCode DefinedBenefit Benefit=f(tenure,wage DefinedContribution

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