1Precautionary Savings Motives and Tax Efficiency of Household Portfolios: An Empirical Analysis

Theoretical portfolio models with taxable and tax-deferred savings re-quire savers to locate higher-tax assets such as bonds in their tax-deferred retirement accounts (TDAs) while keeping low-tax assets (eq-uities) in taxable accounts. Yet, observed portfolio allocations are often not tax efficient. This paper empirically evaluates one of the explana-tions for this puzzle that rests on the simultaneous presence of uninsur-able labor income risk and limited accessibility of TDA assets. Together, these elements lead some borrowing-constrained households to forgo tax efficiency in favor of allocations that provide more liquidity in bad income states—an outcome labeled as precautionary portfolio choice. The analysis of household-level portfolio data from the Survey of Consumer Finances suggests that both the choice of whether to hold a tax-efficient portfolio and the degree of portfolio tax inefficiency are related to the presence and severity of precautionary motives. 1.