INDIVIDUAL RETIREMENT ACCOUNTS AND INTERMEDIATE TERM HOLDING PERIODS

INDIVIDUAL RETIREMENT ACCOUNTS AND INTERMEDIATE TERM HOLDING PERIODS A GENERAL FORMULATION An IRA offers two distinct tax advantages-first, the contribution to the IRA is deductible from current income for tax purposes and, second, the annual earnings on the assets held in the IRA are tax deferred. Withdrawals from the IRA are treated as ordinary income and are taxed at the individual's margmal tax rate at that time. Furthermore, a tax penalty of 10 percent of the amount withdrawn is levied on withdrawals prior to age fiftynine and one-half, except in event of death or disability. Almost any conventional financial asset, for example stocks, bonds, bank deposits, or mutual funds, can be held in an IRA. Moreover, the investor is permitted periodically to switch among the assets held in the IRA. 'Boston University. The author thanks Harold Levin, Mark Hoffman, and the participants of the Boston University Finance/Economics Research Seminar for their useful comments. 'Kulsrud [3] reviews the specific changes in eligibility, contribution, allowable investment, distribution, and tax deferral features for IRAs under the 1981 revisions to the Internal Revenue Code. 'This observation is made by Collins [2] and Kulsrud [3] and is explicitly modeled by Bogan and Bogan [ 11 and S. Smith [4]. These papers http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Financial Review Wiley

INDIVIDUAL RETIREMENT ACCOUNTS AND INTERMEDIATE TERM HOLDING PERIODS

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Abstract

A GENERAL FORMULATION An IRA offers two distinct tax advantages-first, the contribution to the IRA is deductible from current income for tax purposes and, second, the annual earnings on the assets held in the IRA are tax deferred. Withdrawals from the IRA are treated as ordinary income and are taxed at the individual's margmal tax rate at that time. Furthermore, a tax penalty of 10 percent of the amount withdrawn is levied on withdrawals prior to age fiftynine and one-half, except in event of death or disability. Almost any conventional financial asset, for example stocks, bonds, bank deposits, or mutual funds, can be held in an IRA. Moreover, the investor is permitted periodically to switch among the assets held in the IRA. 'Boston University. The author thanks Harold Levin, Mark Hoffman, and the participants of the Boston University Finance/Economics Research Seminar for their useful comments. 'Kulsrud [3] reviews the specific changes in eligibility, contribution, allowable investment, distribution, and tax deferral features for IRAs under the 1981 revisions to the Internal Revenue Code. 'This observation is made by Collins [2] and Kulsrud [3] and is explicitly modeled by Bogan and Bogan [ 11 and S. Smith [4]. These papers

Journal

The Financial ReviewWiley

Published: Nov 1, 1984

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