Embedded options arise in many tax‐related decisions because of the ability to subsequently alter one's choices in response to changing conditions. This article analyzes one type of embedded option that is especially amenable to being modeled and that is of widespread interest: the decision to contribute to a traditional or Roth IRA, where the embedded option arises from the opportunity to subsequently roll over a traditional IRA to a Roth IRA. The results show that the alternative with which the embedded option is associated (i.e., a traditional IRA contribution) might be incorrectly rejected when the option is ignored.
Embedded Options and Tax Decisions: A Reconsideration of the Traditional vs. Roth IRA Decision
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David S. Hulse; Embedded Options and Tax Decisions: A Reconsideration of the Traditional vs. Roth IRA Decision. Journal of the American Taxation Association 1 March 2003; 25 (1): 39–52. doi: https://doi.org/10.2308/jata.2003.25.1.39
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