Breakeven holding periods for tax advantaged savings accounts with early withdrawal penalties

Authors

  • Stephen M. Horan Department of Finance, St. Bonaventure University

DOI:

https://doi.org/10.61190/fsr.v13i3.4797

Keywords:

Tax planning, Saving, Retirement planning, 401(k), IRA

Abstract

At what point does an IRA with an early withdrawal penalty accumulate more wealth than a fully taxable investment? This paper models breakeven holding periods, allowing tax rates to change and the annual return to be partitioned into ordinary income, realized capital gains, and unrealized capital gains— each being taxed differently. Breakeven holding periods decrease at a decreasing rate with the return and can be quite short for investors facing declining tax rates. In addition, breakeven points are very sensitive to how the return on the non-IRA investment is taxed, doubling or tripling when the return is taxed as a typical mutual fund rather than taxed as ordinary income.

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Published

2004-09-30

Issue

Vol. 13 No. 3 (2004): FSR Fall 2004

Section

New Original Submission

License

Copyright (c) 2004 Academy of Financial Services

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How to Cite

Breakeven holding periods for tax advantaged savings accounts with early withdrawal penalties. (2004). Financial Services Review, 13(3), 233-247. https://doi.org/10.61190/fsr.v13i3.4797