Vora, P. (1996).Breakeven periods for individual retirement
accounts with partial withdrawals. Financial Counseling and Planning,
7, 49-56.
Breakeven Periods For Individual Retirement Accounts
With Partial Withdrawals
Premal P. Vora,(1) Pennsylvania
State University Great Valley
If the money invested through an IRA is withdrawn before the investor
turns 59½, it is subject to a penalty of 10%. Therefore, it is unclear
whether an IRA is preferred to an ordinary investment or not. If the money
remains invested in an IRA for a sufficient time, the IRA breaks even despite
the penalty. In this paper, an expression is derived for the break-even
period for a partially withdrawn. It is shown that the break-even periods
are shorter than previously thought. Some simple rules of thumb are proposed
for circumstances when the IRA will be attractive and circumstances when
investors should stay away from the IRA.
KEY WORDS: individual retirement accounts, emergency funds, income-tax,
retirement planning, investment
1. Premal P. Vora, Assistant Professor of Finance,
Penn StateGreat Valley, 30 E. Swedesford Rd., Malvern, PA 19355. Phone:
(610) 648-3374, E-mail: fpv@psu.edu.
A previous version of this article received the McGraw-Hill Best Paper
award at the 1994 Academy of Financial Services meeting.