A reexamination of tax-deductible IRAs, Roth IRAs, and 401(k) investments

Choosing among various tax preferred investment vehicles for retirement planning requires individuals or financial planners to make assumptions about how potential tax savings are to be invested. This paper extends the work of previous studies that assume tax savings are invested in vehicles that are either tax-deferred or taxed each year as ordinary income. We assume tax savings are invested in a typical taxable mutual fund that contains implicit tax-deferral characteristics and find that the results are sensitive to these assumptions. We also extend the analysis to examine employer-sponsored 401(k) plans that match some or all of an employee’s contributions and find that only modest employer contributions are necessary for 401(k)s to dominate Roth IRAs.