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Question--How does the cumulative amount of forgone interest affect the compounding of interest on a below-market loan that spans a term of years?
Even with moderately higher tax rates at retirement, IRA tax-free compounding of interest provides a higher rate of return and better protection from inflation by accumulating funds at a faster rate for retirement.
1987), modified 809 F.2d 497 (8th Cir.) (general rule in admiralty that prejudgment interest be awarded to serve purpose of restitution and full compensation, with the compounding of interest annually promoting "the spirit and intent of this general rule....
Selecting the particular frequency of discounting may involve developing an equivalent frequency pattern, which blends actual market occurrences, such as frequency of receipts, disbursements, and compounding of interest, with physical capabilities and capacities (income capitalization and cash flow models).
When the interest rate was determined every two years (as it was before enactment of the Economic Recovery Tax Act of 1981), the spread between the section 6621 rate and the market rate could have become substantial and therefore encouraging taxpayer "gamimg." With the changes adopted in 1981 and 1982 (requiring frequent adjustments of the rate and the daily compounding of interest), however, the potential for any significant differential was eliminated.