Question: Suppose one of your clients is four years away from
Suppose one of your clients is four years away from retirement and has only $ 2,500 in pretax income to devote to either a Roth or traditional IRA. The traditional IRA permits investors to contribute the full $ 2,500 since contributions to these accounts are tax deductible, but they must pay taxes on all future distributions. In contrast, contributions to a Roth IRA are not tax- deductible. For example, if a person’s tax rate is 25 percent, an investor is able to contribute only $ 1,875 after taxes; however, the earnings of a Roth IRA grow tax- free. Your company has decided to waive the one- time set- up fee of $ 50 to open a Roth IRA; however, investors opening a traditional IRA must pay the $ 50 setup fee. Assuming that your client anticipates that her tax rate will remain at 19 percent in retirement and will earn a stable 7 percent return on her investments, will she prefer a traditional or Roth IRA?
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