An investor must decide between putting a one-time contribution of $2000 into a regular retirement plan or putting $1,440 into a Roth retirement plan. If the investor's tax rate is 28% now and in retirement, and she expects to earn 12% per year over the next 20 years, which will produce more cash in the end?

Question

Quizplus · Accepted Answer

FVIRA (2000) = $2,000 × (1 + 0.12)²⁰ = $19,292.59 after - tax = $19,293 × (1 × 0.28) = $13,890.66 FVRoth (1440) = $1440 × (1 + 0.12)²⁰= $13,890.66 Calculator entries for the traditional plan are N = 20, I/Y = 12, PV = −2,000, PMT = 0, CPT FV → 19,292.59 before taxes. After-taxes the traditional plan balance will be $19.292.59(1 − 0.28) = $13,890.66 Calculator entries for the Roth plan are N = 20, I/Y = 12, PV = −1,440, PMT = 0, CPT FV → 13,890.66, which is the same as the amount in the traditional plan after-taxes.

An Investor Must Decide Between Putting a One-Time Contribution of $2000