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The difference between a Roth IRA and a traditional IRA is that in a Roth IRA...

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Finance

The difference between a Roth IRA and a traditional IRA is thatin a Roth IRA taxes are paid on the income that is contributed butthe withdrawals at retirement are tax-free. In a traditional IRA,however, the contributions reduce your taxable income, but thewithdrawals at retirement are taxable. Assume you plan to devote$5,000 to retirement savings in each year. You will retire in 30years and expect to live for an additional 20 years afterretirement.

a. Assume the before-tax interest rate is 5%.What will be your after-tax 20-year retirement consumption streamif you choose to save in a traditional IRA? Assume your tax rate isfixed at 30%. (Round your answers to 2 decimalplace.)

b. What will be your 20-year retirementconsumption stream if you choose to save in a Roth IRA?(Round your answers to 2 decimal place.)

c. Which provides better expected results ifyou expect your tax rate to decrease from 30% today to 25% atretirement?

  • Traditional IRA

  • Roth IRA

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