Analysis of investment choices for retirement: a new approach and perspective

This paper evaluates deductible individual retirement accounts (IRAs), Roth IRAs, non-deductible IRAs, and open taxable investments using equal initial after-tax investments for the different choices. The concept of a break-even tax rate at the time of withdrawal of funds is used to analyze optimal choice between the deductible IRA and the Roth IRA. The break-even tax rate is seen to be a decreasing function of rate of return on the investment and the investment horizon. Regarding non-deductible IRAs, and open taxable investments, the findings indicate that the non-deductible IRA is the optimal choice for individuals with long investment horizons.