Ever wondered exactly how tax deferral saves you money? Although deferring your income is often cited as a “good thing”, the most common explanation given is a tax arbitrage between your current tax rate and a presumably lower tax rate in retirement. Many people even go so far to say that if your tax rate is the same in retirement then its equivalent, excluding the time value of money. Let’s see if this is actually true.
I’ve put together a small scenario which compares a one-time contribution to a deductible Traditional IRA to a standard investment account (non-tax-advantaged) which is then allowed to grow for the next two decades.
Wow! We realized a 31% gain using a tax-deferred investment option given the same tax rate! (30% in this example)
So how does this deferral advantage change with different tax rates, investment returns, and holding periods? Continued…

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