Question

2b) Clint Crandall is 42 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. You have already computed the type of account with 25yr period to show a $4,000 pre-tax annual contribution earning 10% on his money while being in the 28% percent tax bracket the entire 25yrs. Possible outstanding balance is $436,727.04 Answer B with the information provided.

b) Now, fast-forward 25 years. Given the size of Clint's account in 25 years (as computed in the top), assume he takes it all out in one lump sum. If he's now in the 30% tax bracket, how much will he have, after taxes, with a traditional IRA as compared with a Roth IRA? Comment your findings and determine what kind of IRA would you recommend based on the factors (non quantitative factors) than the numbers you have computed.

Answer 1

In traditional IRA, tax is only levied when you actually withdraws the money. It is not applied while you are saving. While in case of Roth IRA, even when you withdraw the money, you will not be taxed.

So both the options allows you to save money tax free, but traditional IRA in the end hamper you with tax liability which is not the case with Roth IRA.

Calculations:

In my openion, i would recommend Roth IRA, since you will not have the tax burden in the end on your savings