Individual Retirement Plans Research Articles

The Financial Feasibility of Tax-Sheltered Individual Retirement Plans

Current literature on the financial feasibility of tax-sheltered individual retirement plans (TSAs) is scanty. One reason is that most observers believe the results are intuitively obvious since the tax shelter under TSAs allows the accumulation of greater funds at retirement. At that time, the retirement income will be fully taxable and TSAs prove to be a viable investment only when the projected investor's marginal tax rate after retirement is lower than the corresponding tax rate before retirement when savings are made. The study introduces a cash flow model to measure the net cash flows per one dollar annual savings under TSA and the taxed investment alternative for an investor of a certain age, opportunity net rate of return after tax and expense, and marginal tax rates before and after retirement.