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According to a study released by the Investment Company Institute (ICI), “The Tax Benefits and Revenue Costs of Tax Deferral,” in realistic simulations for a variety of investments, the tax benefits from a one-time $1 contribution to a retirement account are greater for a 45-year-old with a 15% marginal tax rate than for a 60-year-old in the 35% tax bracket. Analysts who write about tax policy frequently equate the tax treatment of retirement savings to that of employer-paid health benefits (which are excluded from income) and mortgage interest (which is deducted from income). As a result, they assert that a taxpayer in the 35% tax bracket receives 3.5 times as much tax benefit from deferring $1 in income than would a taxpayer in the 10% bracket. The ICI study, however, points out an important difference: Unlike income that is excluded or deducted, deferred income is eventually subjected to tax when it is withdrawn from a retirement account. Because of this difference, the benefits of tax deferral cannot be calculated in the same manner used to determine the benefits of an exclusion or deduction—by simply multiplying the amount of the exclusion or deduction by the individual’s marginal tax rate. For tax-deferred retirement investments, according to the study, the benefits calculation is not just a function of the individual’s marginal tax rate. Rather, one must assess the effects of deferral over time.
According to a study released by the Investment Company Institute (ICI), “The Tax Benefits and Revenue Costs of Tax Deferral,” in realistic simulations for a variety of investments, the tax benefits from a one-time $1 contribution to a retirement account are greater for a 45-year-old with a 15% marginal tax rate than for a 60-year-old in the 35% tax bracket.
Analysts who write about tax policy frequently equate the tax treatment of retirement savings to that of employer-paid health benefits (which are excluded from income) and mortgage interest (which is deducted from income). As a result, they assert that a taxpayer in the 35% tax bracket receives 3.5 times as much tax benefit from deferring $1 in income than would a taxpayer in the 10% bracket.