Question

In: Accounting

Taxes are probably the most important aspect of personal financial planning. Compare, contrast and comment on...

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.

Solutions

Expert Solution

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 "


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