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kykrilka [37]
3 years ago
12

Monica, 22 just started working full time and plans to deposit $3,000 annually into a roth ira earning 12 percent interest compo

unded annually. How much would she have after 20 years, 30 years, and 40 years? If she decided to make monthly payments of $250 per month instead of the $3,000 each year would she end up with more or less money at the end of 40 years? If she had a 30% tax rate when she took the money out 40 years from now how much in taxes would she have to pay?
Business
1 answer:
Roman55 [17]3 years ago
7 0

Answer:

If she invests $3000 per year,

Monica will have   216157.33  at the end of 20 years

Monica will have 723998.05  at the end of 30 years

Monica will have 2301274.26  at the end of 40 years

When Monica invests $250 per month she will have

$247313.84  after 20 years

$873741.03  after 30 years

$2941193.13  after 40 years

Monica'll have to pay <u>$882,357.94 as taxes on monthly contributions</u>, and <u>$690,382.28  on annual contributions</u>.

Since Monica intends to contribute fixed amounts at regular intervals into a Roth IRA,  we consider these payments as annuities.

We need to compute the Future Values (FV) the annuities. For the first set of calculations the contributions are made annually. So we use the following formula:

\mathbf{FV = A* \frac{(1+r)^{n} -1}{r}}

Substituting the values in the formula above we get,

\mathbf{FV = 3000* \frac{(1+0.12)^{n} -1}{.12}}f she

\mathbf{FV = A* \frac{(1.12)^{n} -1}{0.12}}

We will change the value of n in order to determine the amount at the end of 20, 30 and 40 years

\mathbf{FV_{20} = 3000* \frac{(1.12)^{20} -1}{0.12} = 216157.33 }

\mathbf{FV_{30} = 3000* \frac{(1.12)^{30} -1}{0.12} = 723998.05}

\mathbf{FV_{40} = 3000* \frac{(1.12)^{40} -1}{0.12} = 2301274.26}

_________________________________________________________________

In the next set of calculations Monica deposits $25 each month to IRA, the FV is calculated as follows:

\mathbf{FV = A* \frac{(1+\frac{r}{m})^{mn} -1}{\frac{r}{m}}}

We plug in the values to get

\mathbf{FV_{20} = 250* \frac{(1+\frac{0.12}{12})^{12*20} -1}{\frac{0.12}{12}}}

\mathbf{FV_{20} = 250* \frac{(1.01)^{240} -1}{0.01} = 247313.84 }

\mathbf{FV_{30} = 250* \frac{(1.01)^{360} -1}{0.01} = 873741.03 }

\mathbf{FV_{40} = 250* \frac{(1.01)^{480} -1}{0.01} = 2941193.13 }

_________________________________________________________________

If she has a 30% tax rate after 40 years, she'd have to pay \mathbf{0.3 * 2941193.13 = 882357.94} on monthly contributions.

If her tax rate is 30% after 40 years, she'd have to pay \mathbf{0.3 * 2301274.26  = 690382.28 } on annual contributions.

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