Does participating in a 401(k) raise your lifetime taxes?

Contributing to 401(k)-type plans lowers current taxes, but does it lower lifetime taxes? If tax rates were independent of income and remained constant through time, the answer would be an unambiguous ?yes.? But tax rates may be higher when retirement account withdrawals occur, either because one moves into higher marginal tax brackets or because the government raises tax rates. Moreover, reducing tax brackets when young in exchange for higher tax brackets when old renders mortgage deductions less valuable. Most importantly, shifting taxable income from youth to old age can substantially increase the share of Social Security benefits subject to federal income taxation. This paper studies the lifetime tax advantage gained from participating in 401(k) plans for stylized households. It finds that participation may increase lifetime taxes and reduce lifetime spending for low- and moderate-income households. In contrast, high-income households stand to derive significant lifetime spending gains from participating.