Abstract
This paper compares the value of one dollar of an asset held in a tax-deferred account with one dollar of a similar asset held in a taxable account from the standpoint of providing future retirement income. Taxes that are due when assets are withdrawn from some retirement saving plans can make a dollar held inside a retirement account less valuable than a dollar held in a similar asset outside these accounts, particularly for those who are considering withdrawing assets from the tax-deferred accounts in the near future. This effect is more than offset, however, particularly for younger workers, by the benefits of many years of asset growth at pre-tax rates of return. This paper calibrates the value of the tax burden, and the benefit of compound growth, for assets held in retirement accounts, and describes the differences in relative valuation for households of different ages.
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