On the Valuation of Tax-Advantaged Retirement Accounts

Abstract

Individuals who invest for retirement often hold investment assets in a variety of different types of accounts, some tax-sheltered and some not. The different tax treatments applied to different types of tax-advantaged accounts complicate the task of calculating a single consistent measure of total wealth accumulation. This paper derives models for determining the current after-tax dollar equivalent of assets held in common tax-advantaged retirement accounts so that a prospective retiree can more easily calculate a clear and understandable measure of total wealth accumulation. The results indicate that under certain conditions pre-tax dollars held in a tax-deferred retirement account can be more valuable than an equal number of after-tax dollars, if they are to be used to fund future consumption expenditures. The models developed permit the analysis of many retirement planning decisions using capital investment theory.