Question

Paula is 25, single, and makes $40,000 a year. Paula does not have access to an employer-sponsored retirement plan, but she really wants to start saving for retirement. She can contribute $5,000 of pretax money to a traditional IRA, or she can contribute $4,400 of after-tax money to a Roth IRA. The $600 difference represents the tax that Paula has to pay. Assume Paula continues to make this same annual contribution for 30 years and earns 9% on her investment. 1- Use the time value of money (TVM) formulas to calculate what the future value will be and how much she will have after taxes are paid in retirement by completing the following table. 2- Assuming that Paula continues to save aggressively for retirement and accumulates enough retirement wealth so that she will be in the 22% tax bracket in retirement, which option is better for Paula, a traditional IRA or Roth IRA? Tax Information Traditional IRA Roth IRA Money available to save $5,000 $5,000 Tax on money available to save $0 $600 Net annual contributions $5,000 $4,400 Number of years contributions are made 30 30 Future Value at 9% ? ? Retirement tax rate 22% 0%, qualified Roth IRA distributions are tax-free Tax ? ? After-tax wealth ? ?

          Paula is 25, single, and makes $40,000 a year. Paula does not have access to an employer-sponsored retirement plan, but she really wants to start saving for retirement. She can contribute $5,000 of pretax money to a traditional IRA, or she can contribute $4,400 of after-tax money to a Roth IRA. The $600 difference represents the tax that Paula has to pay. Assume Paula continues to make this same annual contribution for 30 years and earns 9% on her investment.

1- Use the time value of money (TVM) formulas to calculate what the future value will be and how much she will have after taxes are paid in retirement by completing the following table.

2- Assuming that Paula continues to save aggressively for retirement and accumulates enough retirement wealth so that she will be in the 22% tax bracket in retirement, which option is better for Paula, a traditional IRA or Roth IRA?

Tax Information
	Traditional IRA	Roth IRA
Money available to save	$5,000	$5,000
Tax on money available to save	$0	$600
Net annual contributions	$5,000	$4,400
Number of years contributions are made	30	30
Future Value at 9%	?	?
Retirement tax rate	22%	0%, qualified Roth IRA distributions are tax-free
Tax	?	?
After-tax wealth	?	?

Paula is 25, single, and makes 40,000 a year. Paula does not have access to an employer-sponsored retirement plan, but she really wants to start saving for retirement. She can contribute5,000 of pretax money to a traditional IRA, or she can contribute 4,400 of after-tax money to a Roth IRA. The600 difference represents the tax that Paula has to pay. Assume Paula continues to make this same annual contribution for 30 years and earns 9% on her investment.

1- Use the time value of money (TVM) formulas to calculate what the future value will be and how much she will have after taxes are paid in retirement by completing the following table.

2- Assuming that Paula continues to save aggressively for retirement and accumulates enough retirement wealth so that she will be in the 22% tax bracket in retirement, which option is better for Paula, a traditional IRA or Roth IRA?

Tax Information
Traditional IRA Roth IRA
Money available to save 5,0005,000
Tax on money available to save 0600
Net annual contributions 5,0004,400
Number of years contributions are made 30 30
Future Value at 9% ? ?
Retirement tax rate 22% 0%, qualified Roth IRA distributions are tax-free
Tax ? ?
After-tax wealth ? ?

Added by Claudia T.

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