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A teaching note on the tax benefits of retirement savings

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  • Schwartz, Steven T.
  • Spires, Eric E.
  • Young, Richard A.

Abstract

Typical textbook treatments of tax-advantaged retirement savings plans focus on legalistic characteristics such as contribution limits and early withdrawal penalties. Popular press articles on these plans often present a myriad of details on the effects of inflation, rates of return, expected tax rates, ordinary income versus capital gains treatment, and other items that tend to obscure their fundamental tax advantages. The goal of this teaching note is to expose the fundamental tax advantages of retirement savings plans by conducting an analysis of a simplified tax setting. We identify four interrelated benefits of existing retirement plans – tax-deferred contributions, tax-deferred earnings, never-taxed earnings, and income smoothing with progressive tax rates. We also provide a more in-depth analysis of the choice between the two most popular forms of retirement savings, traditional and Roth accounts. An understanding of the properties of the tax benefits of retirement savings can be useful for students who are preparing for careers as tax professionals, as well as individuals who wish to understand the financial planning advice they receive.

Suggested Citation

  • Schwartz, Steven T. & Spires, Eric E. & Young, Richard A., 2015. "A teaching note on the tax benefits of retirement savings," Journal of Accounting Education, Elsevier, vol. 33(2), pages 164-181.
    • Handle: RePEc:eee:joaced:v:33:y:2015:i:2:p:164-181
    DOI: 10.1016/j.jaccedu.2015.02.001
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    References listed on IDEAS

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    1. Annamarie Lusardi & Olivia S. Mitchell, 2005. "Financial Literacy and Planning: Implications for Retirement Wellbeing," Working Papers wp108, University of Michigan, Michigan Retirement Research Center.
    2. Burman, Leonard E. & Gale, William G. & Weiner, David, 2001. "The Taxation of Retirement Saving: Choosing Between Front-Loaded and Back-Loaded Options," National Tax Journal, National Tax Association, vol. 54(n. 3), pages 689-702, September.
    3. Rydqvist, Kristian & Schwartz, Steven T. & Spizman, Joshua D., 2014. "The tax benefit of income smoothing," Journal of Banking & Finance, Elsevier, vol. 38(C), pages 78-88.
    4. Burman, Leonard E. & Gale, William G. & Weiner, David, 2001. "The Taxation of Retirement Saving: Choosing Between Front-Loaded and Back-Loaded Options," National Tax Journal, National Tax Association;National Tax Journal, vol. 54(3), pages 689-702, September.
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