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The IRA and the Withdrawal Penalty
Author(s) -
GYOHANNES AREFAINE
Publication year - 1986
Publication title -
journal of consumer affairs
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.582
H-Index - 62
eISSN - 1745-6606
pISSN - 0022-0078
DOI - 10.1111/j.1745-6606.1986.tb00383.x
Subject(s) - taxable income , taxpayer , economics , investment (military) , tax rate , point (geometry) , depreciation (economics) , argument (complex analysis) , monetary economics , actuarial science , microeconomics , macroeconomics , mathematics , law , accounting , political science , profit (economics) , geometry , capital formation , politics , financial capital , biochemistry , chemistry
Because the IRA is meant to be a vehicle for building a retirement fund, premature withdrawal is discouraged by a 10 percent penalty. The penalty makes the IRA illiquid. The purpose of this manuscript is to reinforce Collins' argument that the IRA can, depending on the yield of the investment and the marginal tax rate of the taxpayer, outperform a taxable investment, earning the same interest rate within a relatively short period of time. For example, if a taxpayer in the 30 percent tax bracket earns 10 percent on the IRA and on a taxable investment, the cross‐over point occurs in approximately five years, assuming a one time investment is made.