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comparison is based on a hypothetical taxpayer in the 28 percent bracket who deposits $2,000 each year into an IRA earning a reasonable 9 percent total return. In 30 years, by deferring taxes, that annual IRA deposit has compounded into a retirement fund worth $297,150. The same investment, with taxes paid each year when due, would be worth only $183,290. That's a difference of $113,860. If you choose to withdraw the entire $297,150 in one lump sum at retirement, federal income taxes would amount to $83,202 (assuming all contributions were tax-deductible). Still, your after-tax nest egg would be $213,948, or $30,658 more than you would have if you paid taxes each year and left the rest to compound.
Most people, however, do not take their IRA money out in one lump sum. Instead, they remove money only as needed throughout their lifetime. This way, your withdrawals are taxable as you take them; the balance of your IRA continues to grow and compound tax deferred.
There is no question that Congress eliminated an immediate tax benefit to thousands of responsible wage earners by denying them an IRA deduction. That does not mean, however, that the benefit of long-term deferral is gone. Even if your $2,000 annual IRA contributions are no longer tax-deductible, consider the future benefits of taxdeferred growth. The numbers say you'll be glad you did. ■
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