Clients plan for retirement

Assignment Help Financial Management

Reference no: EM131563049

You are a financial planner who helps clients plan for retirement. Suppose one of your clients is 4 years away from retirement and has only $1,500 in pretax income to devote to either a Roth or traditional IRA. The traditional IRA permits investors to contribute the full $1,500 since contributions to these accounts are tax-deductible, but they must pay taxes on all future distributions. In contrast, contributions to a Roth IRA are not tax-deductible, meaning that at a tax rate of 17 percent, the investor is able to contribute only $1,245 after taxes; however, the earnings of a Roth IRA grow tax-free. Your company has decided to waive the one-time set-up fee of $25 to open a Roth IRA; however, investors opening a traditional IRA must pay the $25 set-up fee (in the first year only). Assuming that your client anticipates that her tax rate will remain at 17 percent in retirement and will earn a stable 8 percent return on her investments, will she prefer a traditional or Roth IRA?

Reference no: EM131563049

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