Abstract The Economic Recovery Tax Act of 1981 (ERTA) greatly liberalized the rules governing retirement plans. This article incorporates the impact of these ERTA changes in a computer model and explores the affect of premature withdrawals from an Individual Retirement Account. The work of previous authors indicating that tax-sheltered retirement plans are superior to equivalent non sheltered accounts when held to retirement is substantiated. In the case of catty withdrawal, however, Individual Retirement Accounts also make attractive intermediate-term tax shelters for those tax- payers with initial before-tax incomes in excess of 20, 000. The disadvantage of the premature withdrawal penalty may be more than offset by the compound growth taking place in the investment account. Accumulating savings in an Individual Retirement Account and withdrawing before retirement, if needed, may be a wiser investment strategy than had been previously thought.
Saftner et al. (Tue,) studied this question.