If the future income tax rate at retirement (end of year 30) is 30%:1)What is FW or Roth IRA?2)What is FW of Tax-deductible IRA?3)Which plan is better? A Roth IRA enables an individual to invest after-taxdollars during the accumulation phase of a retirementplan. The money is then income tax free when it iswithdrawn during retirement. A tax-deductible IRA,on the other hand, provides an up-front taxdeduction for the annual contribution, but it thenrequires income taxes to be paid on all futuredistributions. A basic assumption as to which plan ismore beneficial concerns the current income taxrates versus their projected rates in the future. Toillustrate, suppose that $2,000 is available to investat the end of each year for 30 years. The income taxrate now and into the foreseeable future is 28%, so$2,000(1 - 0.28) = $1,440 is invested annually intothe Roth IRA. However, $2,000 per year can beinvested into a tax-deductible IRA. Money investedunder either plan will be deposited into a mutual fundearning 8% per year, and all accumulated money willbe withdrawn as a lump sum at the end of year 30.

=Yearly investmentInterest rate[(1+interest rate)time period-1] =$1,4400.08[(1+0.08)30-1]…

Answered: If the future income tax rate at…

If the future income tax rate at retirement (end of year 30) is 30%: 1)What is FW or Roth IRA? 2)What is FW of Tax-deductible IRA? 3)Which plan is bet

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Concept explainers

Tax Deferred Retirement Benefits

It stands for Simplified Employee Pension Individual Retirement Account. This savings plan is for self-employed persons such as independent contractors, freelancers, entrepreneurs, etc. The tax rules of SEP IRA are the same as traditional IRA. Entrepreneurs can also open SEP IRA accounts for their employees and gain a tax advantage. The employees cannot make contributions to these accounts by themselves however they will be taxed upon withdrawal.

Question

If the future income tax rate at retirement (end of year 30) is 30%:

1)What is FW or Roth IRA?

2)What is FW of Tax-deductible IRA?

3)Which plan is better?

A Roth IRA enables an individual to invest after-tax
dollars during the accumulation phase of a retirement
plan. The money is then income tax free when it is
withdrawn during retirement. A tax-deductible IRA,
on the other hand, provides an up-front tax
deduction for the annual contribution, but it then
requires income taxes to be paid on all future
distributions. A basic assumption as to which plan is
more beneficial concerns the current income tax
rates versus their projected rates in the future. To
illustrate, suppose that $2,000 is available to invest
at the end of each year for 30 years. The income tax
rate now and into the foreseeable future is 28%, so
$2,000(1 - 0.28) = $1,440 is invested annually into
the Roth IRA. However, $2,000 per year can be
invested into a tax-deductible IRA. Money invested
under either plan will be deposited into a mutual fund
earning 8% per year, and all accumulated money will
be withdrawn as a lump sum at the end of year 30.

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