Question

An investor must decide between putting $2,000 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?

Answer 1

Answer:

They both produced the same cash amount

Explanation:

The regular retirement would have its deducted after withdrawal from the plan while Roth retirement plan's tax would have been deducted prior to investing funds in the plan

The future value of the $2000 is computed thus:

FV=PV*(1+r)^n

PV is the amount saved in the plan which is $2000

r is the growth rate of the funds in the plan which is 12%

n is the number of years the amount would be left in the plan

FV=$2000*(1+12%)^20=$ 19,292.59  

After tax amount=$ 19,292.59*(1-28%)=$ 13,890.66  

The future value of the $1,440 is computed thus:

FV=$1,440*(1+12%)^20=$ 13,890.66  

The Roth plan has not tax implication thereafter as tax was paid before savings.