Are tax‐deferred investments invariably superior?

Abstract

Financial institutions that are marketing tax‐sheltered plans claim that the implied rates of return of tax‐sheltered strategies are superior to those rates of return realized from taxable plans. The purpose of our paper is to investigate that claim. To accomplish our purpose, we have developed a model to determine, under different assumptions of various tax rates, the incremental benefits and the implied rates of returns of tax‐deferred investments over the taxable investments. When the model is applied, the results show that tax‐deferred investments are not always superior. Consequently, investors may not have a choice but to select portfolios at the lower end of the efficient frontier.

Citation

Srivastava, S.C. and Essayyad, M. (2005), "Are tax‐deferred investments invariably superior?", Management Research News, Vol. 28 No. 4, pp. 45-60. https://doi.org/10.1108/01409170510784797