Saving for Retirement: Taxes Matter

This Issue in Brief begins with a brief description of the
types of accounts that individuals may consider for
retirement saving. It then analyzes two separate issues that
are relevant to different stages of the investment process: 1)
where to invest; and 2) how to value existing investments.
The first issue involves what type of account individuals
should choose in order to maximize their after-tax rate of
return, assuming that each account offers the same pre-tax
return. The analysis of this fundamental saving decision
considers both taxes that are paid “up front” on
contributions and taxes that are paid when funds are
withdrawn. The second issue involves how to determine the
after-tax value of existing assets in order to assess progress
toward meeting a retirement saving target. Since, once the
investments are made, “up-front” taxes are no longer
relevant, this analysis looks only at taxes that are paid when
funds are withdrawn or, in the case of taxable accounts, taxes
that are due along the way.