The Value of Tax Deferral: A Different Perspective on Roth IRAs
Journal of Financial Planning, December 1998
8 Pages Posted: 31 Jan 2009
Date Written: December 1, 1998
This Article explores the circumstances in which tax deferral is beneficial, and derives some basic rules that refine the prevailing view that deferring taxes saves money. It demonstrates that Roth IRAs are often more attractive than traditional tax-deferred retirement plans but for a reason that generally is not emphasized. Specifically, when the tax on monies contributed to a Roth IRA is paid out of funds invested outside the plan, the benefit derived from the tax-free accumulation often will exceed the tax on the contribution. Moreover, the benefit of the Roth IRA is magnified when contributions are invested in high growth vehicles.
Keywords: Roth IRA, tax deferral, retirement plans, IRA, time value of money
JEL Classification: K30, K34, K39
Suggested Citation: Suggested Citation