An IRA may be a better way to save for retirement than a direct taxable investment in, for instance, stocks and bonds. That's the reminder of a reader, Edgar Duhig, of Santa Barbara, Calif.
If a person put $2,000 in an IRA (individual retirement account) for 20 years and the money earned 12 percent a year, the tax-deferred account would be worth
On the other hand, $2,000 of income would be reduced by taxes to $1,200 (assuming a 40 percent tax bracket) when put in a taxable investment. Likewise, only 60 percent of the annual yield would remain after taxes. If the yield of the taxable investment was also 12 percent, then the final balance after 20 years would be $53,903.
Both final balances would have considerably less purchasing power, however, after inflation, Duhig adds. That $112,978, for instance, would only be worth $ 16,794 if inflation continued at a 10 percent annual rate for 20 years.
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