Compare tax rates before and after retirement

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Reference no: EM131217311

Equation 3.9 indicates that the choice as to whether to convert from a deductible IRA into a Roth IRA when the taxpayer expects his future tax rate to decline depends on the relative magnitude of the taxpayer’s current and future tax rates t0 and tn, the holding period n, and the pretax rate of return expected R to be earned on plan assets. (Note also that Equation 3.9 assumes that any taxes due on conversion are paid in the conversion year from nonconverted funds that would otherwise be invested in an SPDA.) Assume V = $50,000 and t0 = .40. Complete the following spreadsheet, first assuming that R = 10%. Then repeat the spreadsheet for R = 5% and R = 15%.

A. Interpret the results. How does the conversion decision vary as a function of the pre-tax rate of return, holding period, and relative magnitudos of tax rates?

B. Compare tax rates before and after retirement?

C. How does the rate impact the decision to go with a traditional (tax favored IRA) or Roth IRA

Reference no: EM131217311

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