A Teaching Note on the Tax Benefits of Retirement Savings

33 Pages Posted: 18 Nov 2013  

Steven Schwartz

SUNY at Binghamton - School of Management

Eric Edward Spires

Ohio State University (OSU) - Department of Accounting & Management Information Systems

Richard A. Young

Ohio State University (OSU) - Department of Accounting & Management Information Systems

Date Written: August 2013

Abstract

Typical textbook treatments of tax-advantaged retirement savings focus on legalistic characteristics such as contribution limits and early withdrawal penalties. Popular press articles often present a myriad of details on the effects of inflation, rates of return, expected tax rates, ordinary income versus capital gains treatment, and other items that tend to obscure the basic properties of the tax advantage. The goal of this teaching note is to provide economic intuition by undertaking a fundamental examination of the properties of the tax benefits of retirement savings. We identify four (interacting) benefits of existing retirement plans - tax-deferred contributions, tax-deferred earnings, never-taxed earnings, and income smoothing with progressive tax rates. We also analyze a “location problem”, which arises when an employee wants to save more than the amount eligible for tax-advantaged status. An understanding of the properties of the tax benefits of retirement savings can be useful for students who are preparing for careers as tax professionals, as well as individuals who wish to understand the financial planning advice they receive.

Keywords: pensions, retirement plans, tax benefits, time value of money

Suggested Citation

Schwartz, Steven and Spires, Eric Edward and Young, Richard A., A Teaching Note on the Tax Benefits of Retirement Savings (August 2013). Available at SSRN: https://ssrn.com/abstract=2356455 or http://dx.doi.org/10.2139/ssrn.2356455

Steven Schwartz

SUNY at Binghamton - School of Management ( email )

P.O. Box 6015
Binghamton, NY 13902-6015
United States

Eric Edward Spires

Ohio State University (OSU) - Department of Accounting & Management Information Systems ( email )

2100 Neil Avenue
Columbus, OH 43210
United States

Richard A. Young (Contact Author)

Ohio State University (OSU) - Department of Accounting & Management Information Systems ( email )

2100 Neil Avenue
Columbus, OH 43210
United States
614-292-0889 (Phone)
614-292-2118 (Fax)

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