Bill Clinton plans to fund his individual retirement account (IRA)with the maximum contribution of $2,000 at the end of each year for the next 20 years.If Bill can earn 12 percent on his contributions,how much will he have at the end of the twentieth year?

Question

Quizplus · Accepted Answer

Using the formula for future value of an annuity:

FV = PMT x [((1 + r)^n - 1)/r]

where PMT is the annual contribution, r is the interest rate per compounding period (in this case, 12%/12 = 1% per month), and n is the number of compounding periods (in this case, 20 years x 12 months/year = 240 months).

FV = $2,000 x [((1 + 0.01)^240 - 1)/0.01]
FV = $2,000 x [(5.074 - 1)/0.01]
FV = $2,000 x 407.4
FV = $814,800

So at the end of the twentieth year, Bill Clinton will have approximately $144,104 ($814,800 - $40,000 in contributions). Therefore, the best answer is D.

Bill Clinton Plans to Fund His Individual Retirement Account (IRA)with