The Bogus Math of Tax Deferral

Chapter 6 Summary:

The choice between a Roth and traditional IRA depends on your anticipation of future tax rates. As detailed in Chapter 5, the extreme likelihood of much higher taxes in our retirement years means that the choice of a Roth retirement account should be considered. Saving in a Roth account removes all concern of future taxes. Also a Roth plan allows the removal of the principle contributions at any time without penalties or taxes. Plus investment gains can be withdrawn after 5 years of the account being opened also without penalties or taxes. In this way, a Roth also serves as an accessible emergency account in addition to a retirement account.

More significantly, the after-tax advantage of both types of IRAs provide only marginally improved retirement cash flow as compared to taxable investment accounts, assuming comparable investment returns. Since there are more investment options within taxable accounts than in tax-deferred accounts, it may be more effective to focus on taxable accounts. In addition, taxable accounts offer superior flexibility and access to money, when compared to tax-deferred accounts.

Other types of investments have tax advantages that are often ignored. These investments are discussed in the following chapters.