The After-Tax Returns from Different Savings Vehicles

Abstract

When saving for retirement, investors' most important decision will probably be the choice of savings vehicles, that is, whether the funds are subject to the tax structure facing personal accounts, deferred annuities, or pensions. The pension tax structure has an overwhelming long-run advantage over the other two forms. A bond or stock fund held in a pension can expect to earn at least 2.5 percentage points a year more after taxes than the same fund held in a personal account. For the 1984–93 period, no bond fund could beat a bond index fund by 2.5 percentage points a year, and few stock funds could beat a stock index fund by 2.5 points a year. Thus, the choice of savings vehicles is more important to the long-run investor than the choice of bond and stock funds.