Using “Equivalent Tax Rates” to Determine Tax-Efficient Retirement Investment and Withdrawal

Abstract

The authors propose an equivalent tax rate framework to compare the tax-efficient accumulation and withdrawal of retirement funds across multiple investment vehicles. The method allows for the consideration of a given investment vehicle’s expected return, time horizon, and tax treatment relative to a tax-deferred retirement account receiving pre-tax contributions and possible employer matching of contributions. The metric is comparable across alternative investment accounts irrespective of the specific marginal tax rate in place during the accumulation or distribution stages.