Question

Deciding between traditional and Roth IRAs

Clint Crandall is in his early 30s and is thinking about opening an IRA. He can't decide whether to open a traditional/deductible IRA or a Roth IRA, so he turns to you for help.

To support your explanation, you decide to run some comparative numbers on the two types of accounts; for starters, use a 30-year period to show Clint what contributions of $5,000 per year will amount to (after 30 years) given that he can earn, say, 10% on his money. Round your answers to the nearest dollar.

Traditional IRA	$ ___________
Roth IRA	$ ___________

Answer 1

Traditional IRA Roth IRA

Assumptions are

Pre - retirement return 10% Given

Post- retirement return 4% Assumed

Pre - retirement Tax rate 28% assumed

Post- retirement return 28% assumed

Traditional IRA Roth IRA   

	Traditional IRA		Roth IRA
Year	Investment	Ending value	Investment	Ending value
1	5000.00	5500.00	3600.00	3960.00
2	5000.00	11550.00	3600.00	8316.00
3	5000.00	18205.00	3600.00	13107.60
4	5000.00	25525.50	3600.00	18378.36
5	5000.00	33578.05	3600.00	24176.20
6	5000.00	42435.86	3600.00	30553.82
7	5000.00	52179.44	3600.00	37569.20
8	5000.00	62897.38	3600.00	45286.12
9	5000.00	74687.12	3600.00	53774.73
10	5000.00	87655.84	3600.00	63112.20
11	5000.00	101921.42	3600.00	73383.42
12	5000.00	117613.56	3600.00	84681.76
13	5000.00	134874.92	3600.00	97109.94
14	5000.00	153862.41	3600.00	110780.93
15	5000.00	174748.65	3600.00	125819.03
16	5000.00	197723.51	3600.00	142360.93
17	5000.00	222995.87	3600.00	160557.02
18	5000.00	250795.45	3600.00	180572.73
19	5000.00	281375.00	3600.00	202590.00
20	5000.00	315012.50	3600.00	226809.00
21	5000.00	352013.75	3600.00	253449.90
22	5000.00	392715.12	3600.00	282754.89
23	5000.00	437486.63	3600.00	314990.38
24	5000.00	486735.30	3600.00	350449.41
25	5000.00	540908.83	3600.00	389454.36
26	5000.00	600499.71	3600.00	432359.79
27	5000.00	666049.68	3600.00	479555.77
28	5000.00	738154.65	3600.00	531471.35
29	5000.00	817470.11	3600.00	588578.48
30	5000.00	904717.12	3600.00	651396.33

Traditional IRA		904717.12			Roth IRA	651396.33
						651396.33
You have to pay Tax while withdrawing   money after retirement under Traditional IRA					BUT I don’t have to pay tax on money withdrawing after retirement under Roth IRA
under traditional IRA					under ROTH IRA
Let’s assume that you want to withdraw after tax every year 75000 after retirement
		withdraw after tax		75000.00
		before tax amount		104166.67
	opening balance	withdraw after tax	ending balance( with 4% return)		opening balance	withdraw (no TAX)	ending balance( with 4% return)
31.00	904717.12	104166.67	832572.48		651396.33	75000.00	599452.18
32.00	832572.48	104166.67	757542.04		599452.18	75000.00	545430.27
33.00	757542.04	104166.67	679510.39		545430.27	75000.00	489247.48
34.00	679510.39	104166.67	598357.47		489247.48	75000.00	430817.38
35.00	598357.47	104166.67	513958.44		430817.38	75000.00	370050.08
36.00	513958.44	104166.67	426183.44		370050.08	75000.00	306852.08
37.00	426183.44	104166.67	334897.45		306852.08	75000.00	241126.16
38.00	334897.45	104166.67	239960.01		241126.16	75000.00	172771.21
39.00	239960.01	104166.67	141225.08		172771.21	75000.00	101682.06
40.00	141225.08	104166.67	38540.75		101682.06	75000.00	27749.34
After 10 years of retirement MY balance is			38540.75				27749.34
	It look like a traditional IRA is better choice but tax rate should be same as post and pre retirement ( i.e @28%)