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Question: A Roth IRA enables an individual to invest after-tax dollars during the accumulation phase of a retirement plan. The money is then income tax free when it is withdrawn during retirement. A tax deductible IRA, on the other hand, provides an upfront tax deduction for the annual contribution, but it then requires income taxes to be paid on all future distributions. A basic assumption as to which plan is more beneficial concerns the current income tax rates versus their projected rates in the future. To illustrate, suppose that $2,000 is available to invest at the end of each year for 30 years. The income tax rate now and into the foreseeable future is 28%, so $2,000(1 - 0.28) = $1,440 is invested annually into the Roth IRA. However, $2,000 per year can be invested into a tax-deductible IRA. Money invested under either plan will be deposited into a mutual fund earning 8% per year, and all accumulated money will be withdrawn as a lump sum at the end of year 30.
a. Which plan is better if future distributions of the traditional (tax-free) IRA are taxed at an income tax rate of 28%?
b. Which plan is better if the future income tax rate at retirement (end of year 30) is 30%?
Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..
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