The Value of Tax Deferral: A Different Perspective on Roth IRAs

Kwall, Jeffrey L.
December 1998
Journal of Financial Planning;Dec1998, Vol. 11 Issue 6, p46
Academic Journal
This article identifies the limited circumstances in which tax deferral confers economic benefits. When tax rates remain constant, deferring the tax on a receipt does not yield an economic benefit when the alternative is to pay a front-end tax. An economic benefit is conferred under these circumstances only when deferral of the tax upon receipt is accompanied by deferral of the tax on the returns generated by the receipt. Similarly, if the tax on the returns is deferred, economic benefits will be derived regardless of whether a front-end or a back-end tax at the same rate is imposed. Notwithstanding these principles, a Roth individual retirement accounts (IRA) will often yield greater economic benefits than a traditional retirement plan for an individual whose tax rate does not decline after retirement. Specifically, if the front-end tax is paid from outside sources, the benefits derived from a Roth IRA are greater than the benefits of a traditional retirement plan. Moreover, if amounts contributed to a Roth IRA are invested in high-growth vehicles, even greater incremental benefits can be derived.


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