Question

Taxes are probably the most important aspect of personal financial planning. Compare, contrast and comment on the lifetime financial effect of not making an IRA contribution, a traditional IRA contribution and a Roth IRA contribution. Assume a 50% tax rate, 50 years and 15% compounding.

Answer 1

GIVEN INFORMATION:

Taxes are probably the most important aspect of personal financial planning.

Compare, contrast and comment on the lifetime financial effect of not making an IRA contribution, a traditional IRA contribution and a Roth IRA contribution

REQUIRED:

Assume a 50% tax rate, 50 years and 15% compounding.

SOLUTION:

IF NOT CONTRIBUTED:

Let amount be = 3000$

After tax = 1500$

Compounding rate = 15%

Tax at the rate = 50%

Amount available after 50 years = 1,625,486$

Initially amount invested after = - 75,000$

Annual earnings = 1,550,486$

Tax on earning @ 50 % = 775,243$

Therefore Net Earning Post Tax = 775,243$

UNDER TRADITIONAL METHOD:

Amount available for contribution = 3000$

Amount after 50 years = 3,250,972$

Amount Deposit = - 150,000$

(3000 * 50)

Annual earning = 3,100,972 $

Tax on earning @ 50% = 1,550,486$

Therefore Net Earning Post Tax = 1,550,486,$

" TRADITIONAL METHOD SAVINGS = 24901119.71 "

ROTH RIA METHOD :

Ira total retirement = 24,901,121$

Taxable savings account = 1,556,159$

Differnce = 23,344,962$

CONCLUSION:

" Reserve funds in conventional technique is more than Roth strategy, it's smarter to go for customary technique , rather than Roth technique "