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compare the end result of saving in either a regular investment

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solution


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In this assignment we are going to compare the end result of saving in either a regular investment account, a traditional IRA or a Roth IRA. We need to make a few;assumptions in order to make this a fair comparison and to keep things fairly straight forward;Assumptions;1. You have $5,000 of gross income (before taxes) available to invest in year one and we will label this "Gross to Contribute". This amount will grow each year at a;fixed rate that we will label "Contrib Growth Rate;2. All gains each year in the regular investment account will be realized, and thus taxable. By realizing the gains each year this will mean that there is no outstanding;taxable capital gain at the end of the investment period. (this assumption keeps the tax situation manageable without adding too much complexity to our calculations);3. Each year's gain will be made up of some part Short Term (ST), and the rest Long Term (LT). Since LT and ST gains are taxed at different rates the spreadsheet is;designed to handle this. Make s ure yo uhandle the s e taxe s pro pe rlyinyo urc alc ulatio ns.;4. You will be investing for 30 years and make your annual contribution at the end of each year.;5. Inside each of the three types of accounts you will be invested in identical items, therefore the rate of return for each account will be the same.;6. You are starting today with a $0 balance;Go al:Pro pe rlyc alc ulate the finale ffe c tive AFTERTAXbalanc e fore ac ho fthe thre e ac c o unts us ing the as s umptio ns s upplie d;Ins truc tio ns (re adthroug hc o mple te lybe fo re s tarting);1. You are to populate all the green cells (cell ranges F3:S32 and C21:C23) on the worksheet labeled "Comparison" with the proper equations and/or cell references to;answer the question "In which account will you have to most after tax dollars available in 30 years;2. For the Investment Account;A. Your contributions (Additions) will go in AFTER TAX since there is no tax deductibility of investment account contributions.;B. Your Gain each year will be the Rate of Return applied to the Beginning Balance;C. The Ending Balance each year needs to reflect the Gain, but NET of the TAXES. Reference the proper ST and LT rates and weights from the assumptions.;D. Bottom line - The ending balance each year will be the Beg Balance PLUS the after tax gain PLUS the additions for that year.;E. Beginning Balance each year is simply the Ending Balance from year before.;F. Since we are assuming all gains are realized each year (and taxed) the ending balance after 30 years will have no additional taxes due at that time.;G. Note: in a more realistic example we would have un-realized gains at the end that would still be subject to taxes. We are not modeling that situation here.;3. For the Traditional IRA Account;A. Your contributions (Additions) will go in PRE TAX as we are assuming the contributions are deductible;B. Your Gain each year will be the Rate of Return applied to the Beginning Balance;C. Since gains are not subject to taxes while inside the IRA, the End Balance will simply be the Beg Balance +Gain +Additions;D. Remember that since the IRA contributions and gains have never been taxed, upon distribution at the end the entire balance will be subject to Income (ST) taxes;at the ST tax rate.;4. For the Roth IRA Account;A. Your contributions (Additions) will go in AFTER TAX since there is no tax deductibility of Roth IRA contributions.;B. Your Gain each year will be the Rate of Return applied to the Beginning Balance;C. Since gains are not subject to taxes while inside the Roth IRA, the End Balance will simply be the Beg Balance +Gain +Additions;D. Since taxes were paid when the contributions were made, all qualified distributions for the Roth IRA will be Tax FREE at the end;5. In the "Net After Tax Value at End" section fill the 3 cells (C21:C23) with the proper references/calculations to show the true after tax value of the three accounts;using the "Retirement Tax Assumptions" along the left side of the worksheet. Once this is complete you will be able to alter the input assumptions and see the affect it;has on the comparative values of the three accounts.;6. Whe ns ubmitting the as s ig nme nt,ple as e le ave the as s umptio ns inc e lls C3:C18as Ihave the mpre po pulate d. I encourage you to play with those input;assumptions to see their affect, but reset them to the defaults before submitting.;General Assumptions;Rate of Return;Gross to Contribute;Contrib Growth Rate;8%;$5,000;3%;Current Tax Assumptions;ST Tax Rate;LT Cap Gains Rate;% of Gains LT;% of Gains ST;25%;15%;50%;50%;Retirement Tax Assumptions;ST Tax Rate;25%;LT Cap Gains Rate;15%;% of Gains LT;50%;% of Gains ST;50%;Net After Tax Value at End;Investment Acct;Taditional IRA;Roth IRA;Year;1;2;3;4;5;6;7;8;9;10;11;12;13;14;15;16;17;18;19;20;21;22;23;24;25;26;27;28;29;30;Beg Bal;Investment Account;Gains;Additions;End Bal;Beg Bal;Traditional IRA;Gains;Additions;End Bal;Beg Bal;Roth IRA;Gains;Additions;End Bal;View Full Attachment

 

Paper#30676 | Written in 18-Jul-2015

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