(Retirement planning) You have $5,000 to invest now and you don\'t need this mon
ID: 1116904 • Letter: #
Question
(Retirement planning) You have $5,000 to invest now and you don't need this money for the next 20 years 2. As a person with substantial earnings, you are not allowed to make pre-tax contributions to your IRA account. But you could invest this $5,000 today in an IRA account as an "after-tax" contribution for tax year 2017 (Alternative A). a. b. Your second option (Alternative B) is to invest this $5,000 in a non-tax shelter such as a mutual fund In both cases you don't plan to make no future contributions. In both cases you expect to earn 7%/year on the investment. In 2037 you want to liquidate your IRA account. Since you will not be 59 ½ years of age by 2037, you will be forced to pay a 10% penalty to the IRS on your "pre- tax" contributions and all tax-deferred earnings in the account What will be the lump sum amount available to you from this investment in 2037 for each of the alternatives? (Assume that you are currently in the 27% tax bracket and tax rate doesnt change in the next 20 years)Explanation / Answer
Answer:
Investment amount $ 5,000
Period - 20 Years
Rate of return -7%
Future value of lump sum - 3.870 (Refer Future Value Table)
Amount availabe after 20 years = $5000 x 3.870= $19,348
Alternative One (Investment in Retirement Plan)
Amount received after 20 years $19,348.42
Less: 10% penalty $5,000.00
Amount available after penalty $17,413.58
Alternative Two (Investment in Mutual Fund)
Amount received after 20 years $19,348.42
Less: Cost of investment $5,000.00
Income from investment $14,348.42
Tax on Income $3,874.07
After Tax Income $10,474.35
Total amount available after tax is $15,474.35 ($10,474.35+$5,000)
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