question 2: Suppose one of your clients is four years away from retirement and h

Question

question 2: Suppose one of your clients is four years away from retirement and has only $1,500 in pretax income to devote to either a Roth or a traditional IRA. The traditional IRA permits investors to contribute the full $1,500 since contributions to these accounts are tax-deductible, but they must pay taxes on all future distributions. In contrast, contributions to a Roth IRA are not tax deductible, meaning that at a tax rate of 25 percent, an investor is able to contribute only $1,125 after taxes; however, the earnings of a Roth IRA grow tax-free. Your company has decided to waive the one-time set-up fee of $25 to open a Roth IRA; however, investors opening a traditional IRA must pay the $25 set-up fee. Assuming that your client anticipates that her tax rate will remain at 17 percent in retirement and will earn a stable 8 percent return on her investments; will she prefer a traditional or a Roth IRA?

Explanation / Answer

yes she prefer a traditional

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