Harold and Maude are both 55 years of age and have two married children. Harold is an
Question:
Harold and Maude are both 55 years of age and have two married children. Harold is an engineer and is an active participant in his company’s qualified pension plan. Maude is a retired school teacher and works for an educational nonprofit organization. Harold and Maude plan to retire at age 60 and relocate to South Carolina. Because the non-profit organization does not have a qualified pension plan for its employees, Maude must decide whether to set up a conventional deductible IRA or a Roth IRA. With either IRA, she plans on making the maximum allowable contribution for each of the next five years and does not anticipate making any contributions after retiring. Harold and Maude will not draw on the account until they are age 65. At that time, they plan to draw down the fund balance equally over a ten-year period to use for trips with their children and grandchildren. Determine whether Maude will have more funds available for her trips with a conventional deductible IRA or a Roth IRA. In making this determination, assume the following:
Any current tax savings from a deductible IRA will be invested in a tax-free municipal bond fund that will earn 5% annually until age 65
The earnings on either IRA account will be 8% annually until age 65
Their marginal tax rate will be 28%while both are working and 25% when they retire
Their adjusted gross income is expected to be less than $150,000 for each year that they are both working
Step by Step Answer:
Concepts In Federal Taxation
ISBN: 9780324379556
19th Edition
Authors: Kevin E. Murphy, Mark Higgins, Tonya K. Flesher