Concept explainers
a.
Adequate information:
Saving contribution = $5,000 pa
Retire in 30 year and expected to live after retirement 20
Contribution | Withdrawal | |
R IRA | Tax | Tax Free |
T IRA | Tax Free | Tax |
To compute: 20-year retirement consumption if tax rate 30%, if choose traditional method.
Introduction:
a.
Explanation of Solution
Here,
Formula used=FV =
= 232,535.97
Final answer:-$232,535.97
Thus the 20-year annuity consumption value is $2,32,535.97.
b.
Adequate information:
Saving contribution = $5,000 pa
Retire in 30 year and expected to live after retirement 20
Contribution | Withdrawal | |
R IRA | Tax | Tax Free |
T IRA | Tax Free | Tax |
To compute:Computation of 20-year retirement consumption if choose traditional method.
Introduction: Annuity due is a case where payment is made at the beginning of each period. Interest is earned for each period. For example: Bank recurring deposit account.
b.
Explanation of Solution
Here, tax will be deducted from annual savings amount and later future value will be calculated using annuity formua. The calculations has been shown below:
20 year annuity consumption value under Roth IRA is 2,32,535.
c.
Adequate information:
Saving contribution = 5000 pa
Retire in 30 year and expected to live after retirement 20
Contribution | Withdrawal | |
R IRA | Tax | Tax Free |
T IRA | Tax Free | Tax |
To discuss:The one that would provide better results if rate reduced 30% to 25% at retirement.
Introduction: Annuity due is a case where payment is made at the beginning of each period. Interest is earned for each period. For example: Bank recurring deposit account.
c.
Explanation of Solution
Here, future value of both are compared using annuity formula and respective rate.
By traditional method
By Roth method
20 year annuity consumption value under traditional method is better when tax rate is reduce from 30% to 25% at retirement.
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