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Suppose one of your Clients is four years

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Suppose one of your Clients is four years away from retirement and only has $1500 in pre tax income to devote to either a Roth or a traditional IRA. The traditional IRA permits investors to contribute the full $1500 since contributions to these accounts are tax deductible, but they must pay taxes on all future distributions. In contributions to a Roth IRA are not tax deductible, meaning that at a tax rate of 25 percent an investor is able to only contribute only $1125 after taxes;however, the earnings of the Roth IRA grow tax free. Your company has decided to waive the one time set up fee of $25 dollars, however investors opening a traditional IRA must pay the $25 dollar set up fee. Assuming that your client anticipates that her tax rate will remain at 17% in retirement and will earn a stable 8% return on her investment, will she prefer a traditional or a Roth IRA?

 

Paper#26228 | Written in 18-Jul-2015

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