Suppose a taxpayer, when 25 years old, made one tax-deductible $2,000 contribution of her after-tax salary to a deductible IRA. Her investment (taxable corporate bonds) earned a 12% annual return, and she liquidates the investment 10 years later when she retires. Her tax rate is 35%, but she must pay an additional 10% excise tax because she liquidates the IRA before she reaches the age 59.5.

a. After taxes, how much cash does she have when she liquidates the IRA?

b. Was it a mistake for the taxpayer to have set up an IRA? What would she have earned had she invested her after-tax salary in the taxable corporate bonds directly instead of through an IRA?

Answer rating: 100% (QA)

a Taxpayer deposits 2000 tax deductible Pretax contribut... View the full answer