Clint Crandall is in his early 30s and is thinking about opening an IRA. He can\
ID: 3196839 • Letter: C
Question
Clint Crandall is in his early 30s and is thinking about opening an IRA. He can't decide whether to open a traditional/deductible IRA or a Roth IRA, so he turns to you for help.
To support your explanation, you decide to run some comparative numbers on the two types of accounts; for starters, use a 30-year period to show Clint what contributions of $5,000 per year will amount to (after 30 years) given that he can earn, say, 10% on his money. Round your answers to the nearest dollar.
Assuming that Clint is in the 28% tax bracket (and will remain there for the next 30 years), determine the annual and total (over 30 years) tax savings he'll enjoy from the $5,000-a-year contributions to his IRA; contrast the (annual and total) tax savings he'd generate from a traditional IRA with those from a Roth IRA. If an answer is zero, enter "0".
Now, fast-forward 30 years. Given the size of Clint's account in 30 years (as computed in part a), assume he takes it all out in one lump sum. If he's still in the 28% tax bracket, how much will he have, after taxes, with a traditional IRA as compared with a Roth IRA? Round your answers to the nearest dollar.
Traditional IRA $ ____________ Roth IRA $_____________Explanation / Answer
for traditional ira there wiil not be any tax paid during the 30 year investment period so annual investment in traditional ira becomes $5000
so, total amount by traditional ira = $5000 *( (1+r)30 - 1) / r ) (1+r)
= 5000*180.943
= $904717
now for oth ira we have to pay a tax of 28% on each investment. so, our investment becomes 5000*(1-0.28) = 3600
so, total amount in roth ira = 3600( (1+0.1)30 - 1) / 0.1) (1.1)
= 3600*180.943
= $651396
traditional ira tax saving annualy during investment period is 5000 *0.28 = $1400
total traditional ira tax saving during investment period = 1400*30 = $42000
roth ira tax saving annualy during investment period = $0
total roth ira tax saving during investment period = $0
total lump sump amount gain after 30 years of investment in traditional ira = 904717*(1-0.28) = $651396 a ( @ after tax rate = 28%)
total lump sump amount gain after 30 yeras of investment in roth ira = 651396*(1-0) = $651396
( @ after tax rate = 0%)
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