Frequently Asked Questions Related to Savings Vehicles

Abstract

The third in a series of articles on the interaction between tax and investment issues, this article starts with a simple example: projecting constant annual after-tax retirement incomes for each of four representative investors. Each investor can save in any five savings vehicles. This analysis also considers projected retirement incomes for low-cost and average-cost annuities and three investors who differ in how quickly they realize capital gains in the taxable account. The author then uses these retirement income projections to answer nine frequently asked questions related to savings vehicles. He concludes that deductible pensions and Roth IRAs are the best saving vehicles for bonds and for stocks, for all four hypothetical investors, and for all investment horizons, and offers several broad asset location rules.