Life-cycle stock market participation in taxable and tax-deferred accounts

The stock market participation rate for U.S. households with assets in both taxable and tax-deferred accounts is increasing with age in taxable accounts and decreasing with age in tax-deferred accounts. This paper asks whether a quantitative life-cycle model of portfolio choice can match these life-cycle patterns of stock market participation. The model incorporates several key features into a standard life-cycle model: (i) Epstein-Zin preferences; (ii) moderate heterogeneity in risk aversion, (iii) a progressive tax system with a basis-reset provision; and (iv) stock market entry costs in both taxable and tax-deferred accounts. We find that the stock market participation rate is increasing with age in taxable accounts due to the entry costs. We also show that a low capital gains realization rate drives down the stock market participation rate in tax-deferred accounts for old households. However, the basis-reset provision of the capital gains tax is not quantitatively important. JEL classification: G11; H20