The Unintended Consequences of Roth IRAs

29 Pages Posted: 20 Dec 2021 Last revised: 16 Mar 2022

See all articles by Lorenzo Bretscher

Lorenzo Bretscher

Swiss Finance Institute - HEC Lausanne; Centre for Economic Policy Research (CEPR)

Riccardo Sabbatucci

Stockholm School of Economics; Swedish House of Finance

Andrea Tamoni

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Date Written: December 12, 2021

Abstract

We provide the first academic study on the performance of IRA pension plans from 2004 through 2018. At the aggregate level, the risk-adjusted performances of IRA plans are comparable to that of the aggregate equity market. However, high-income individuals substantially outperform low-income ones, and this return differential is almost three times as large in "tax-free" Roth IRAs, suggesting that their introduction, intended to help hard-working, middle-class Americans, greatly benefited high-income individuals and amplified wealth inequality.

Keywords: Roth IRA, Traditional IRA, Inequality, Pension schemes

JEL Classification: G50, G51, J32

Suggested Citation

Bretscher, Lorenzo and Sabbatucci, Riccardo and Tamoni, Andrea, The Unintended Consequences of Roth IRAs (December 12, 2021). Swedish House of Finance Research Paper No. 22-04, Available at SSRN: https://ssrn.com/abstract=3989150 or http://dx.doi.org/10.2139/ssrn.3989150

Lorenzo Bretscher

Swiss Finance Institute - HEC Lausanne ( email )

Chavannes-près-Renens, Vaud
Switzerland
1015 (Fax)

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

Riccardo Sabbatucci (Contact Author)

Stockholm School of Economics ( email )

PO Box 6501
Stockholm, 11383
Sweden

Swedish House of Finance

Drottninggatan 98
111 60 Stockholm
Sweden

Andrea Tamoni

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

1 Washington Park
Newark, NJ 07102
United States

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