The effect of credits on optimal tax-deferral strategies
DOI:
https://doi.org/10.61190/fsr.v16i1.4873Keywords:
Individual retirement account, Tax deferral, Retirement planningAbstract
This paper examines how the Saver’s Tax Credit changes optimal tax-deferral choices of individ- uals. We identify optimal tax-deferral strategies in the presence of tax-deferral credits and changing tax regimes. We also develop equations for the rate of return at which investors will be indifferent between taxed and tax-deferred investment. The results indicate that tax credits and the timing of future tax changes have a large impact on optimal tax-deferral choices. Individuals can use the results presented here to make more informed tax-deferral choices. The results also provide insight into optimal individual behavior when employers match pension contributions.
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