Business, 21.04.2020 20:01 yovann

Dan, and Mike are brothers. They plan to begin savings plans when each is exactly 25. Each brother plans to save $6,000 per year by investing $500 each month into Tax Sheltered or Tax Deferred IRAs.

Dan plans to invest his money into a stock mutual fund with a Traditional IRA earning a 9% average annual return.

Mike plans to invest into a Stock mutual fund with a Roth IRA earning a 9% average annual return.

Assume that the combined federal and state marginal income tax rate for each brother is currently 25% and will remain this percentage during their working years.

The $6,000 available for investment by each bother is before income taxes.

Also, assume that the marginal combined federal and state income taxes will be 20% for each brother during his retirement years.

Remember that the $6,000 available for investment per year is before the payment of income taxes and both will have available for investing monthly ($6,000 / 12 = $500 per month).

1. How much will Dan have in his traditional IRA account at 67? Follow the proper taxation for this type of retirement account.

A) Amount available to invest after taxes per month?

B) Amount in account at age 67?

C) Briefly explain the taxation on withdrawals from a Traditional IRA

2. How much will Mike have in his Roth IRA at age 67? Follow the proper taxation for this type of retirement account.

A) Amount available to invest after taxes per month?

B) Amount in account at age 67

c) Briefly explain the taxation on the withdrawals from a Roth IRA

3. If both brothers are expected to be taxed at a 20% tax rate in retirement, which retirement plan will have the best after tax results?

Answers: 2

Show answers

Answers

1. How much will Dan have in his traditional IRA account at 67? Follow the proper taxation for this type of retirement account.

A) Amount available to invest after taxes per month?

$500

B) Amount in account at age 67?

$2,813,492

C) Briefly explain the taxation on withdrawals from a Traditional IRA

IRA contributions are made before income taxes are paid, that is why Dan's monthly contributions are higher. The disadvantage is that Dan's plan will be taxed later.

2. How much will Mike have in his Roth IRA at age 67? Follow the proper taxation for this type of retirement account.

A) Amount available to invest after taxes per month?

$375 until 59.5 years old, then $500

B) Amount in account at age 67

$2,072,879

c) Briefly explain the taxation on the withdrawals from a Roth IRA

Roth IRA contributions are made after income taxes are paid, that is why Mike's monthly contributions are lower. The advantage is that Mike's plan will not be taxed later.

3. If both brothers are expected to be taxed at a 20% tax rate in retirement, which retirement plan will have the best after tax results?

In this case, since the tax rate is higher while they are working (25%), than once they retire (20%), the traditional IRA account could make more sense except that since the time span is very long, your account will accumulate a lot of earned interest. The total principal invested into the traditional IRA account is $252,000 and the interest gained is $2,561,492 and that part will be taxed once you start withdrawing money. In order to determine which account would be better, you need to estimate how many years will Dan and Mike live after retiring, the longer they live the best option is the Roth IRA account.

Explanation:

the formula to determine the future value of an annuity is:

FV = P x [(1 + r)ⁿ - 1] / r

Dan's monthly contribution = $500

Mike's monthly contribution = $500 x (1 - 25%) = $375 until age 59.5, then $500

Dan's n = 42 years x 12 months = 504

r = 9% / 12 = 0.75%

Mike's n = 414 for $375 and 90 for $500

Dan's FV = $500 x [(1 + 0.75%)⁵⁰⁴ - 1] / 0.75% = $2,813,492

Mike's FV = $375 x [(1 + 0.75%)⁴¹⁴ - 1] / 0.75% = $1,052,612

then $1,052,612 x (1.09)⁷°⁵ = $2,008,940

Mike's FV = $500 x [(1 + 0.75%)⁹⁰ - 1] / 0.75% = $63,939

total = $2,008,940 + $63,939 = $2,072,879

Answer from: Quest

im almost done gimme more time to get the answer

Answer from: Quest

the correct answer is d. wealthy colonists to take care of the less fortunate. hope this

Another question on Business

Business, 22.06.2019 16:50

Coop inc. owns 40% of chicken inc., both coop and chicken are corporations. chicken pays coop a dividend of $10,000 in the current year. chicken also reports financial accounting earnings of $20,000 for that year. assume coop follows the general rule of accounting for investment in chicken. what is the amount and nature of the book-tax difference to coop associated with the dividend distribution (ignoring the dividends received deduction)?

Answers: 2

Answer

Business, 23.06.2019 02:30

What provides financial support to workers who are retired or have disabilities? medicare social security tax withholdings medicaid

Answers: 1

Answer

Business, 23.06.2019 03:00

Why is the type of product sold in an industry an important characteristic? a firm that can differentiate its product from that of rivals may be able to charge a higher price for a superior product. a firm that sells intangible goods is usually considered a monopoly. service industries cannot differentiate their products, which makes it easy for new firms to enter the industry. expensive products are usually sold by perfectly competitive firms.

Answers: 2

Answer

Business, 23.06.2019 04:50

Which of the following results from the latest decision round is most important in providing guidance to company managers make in strategic moves and decisions to improve their companies competitiveness and rank among the top-performing companies in the current decision round

Answers: 3

Answer

You know the right answer?

Dan, and Mike are brothers. They plan to begin savings plans when each is exactly 25. Each brother p...

Questions