Choosing between tax-advantaged savings accounts
DOI:
https://doi.org/10.61190/fsr.v12i4.4775Keywords:
Tax planning, Saving, Retirement planning, IRA, 401(k)Abstract
Previous research models the choice between a traititional IRA and Roth IRA by standerdizing either the pretax investment or the after-tax investment. This paper synthesizes these: two approaches and develops a unified model that accommodates changing tax rates and different types of tax structures during the accumulation phase. Siinulations indicate that the investor’s withdrawal tax rate is important in making the optimal choice. We also argue that uncertainty about future tax rates increases thc value of the traditional IRA, but that in any case investors benefit from having a portfolio of both traditional IRAs and Roth IRAs when withdrawals are made.
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