Question

Kirby made contributions to a Roth IRA over the course of 35 working years. His contributions averaged $2,000 annually. Kirby was in the 26% tax bracket during his working years. The average annual rate of return on the account was 5%. Upon retirement, Kirby stopped working and making Roth IRA contributions. Instead, he started living on withdrawals from the retirement account. At this point, Kirby dropped into the 15% tax bracket. Factoring in taxes, what is the effective value of Kirby’s Roth IRA at retirement? Assume annual compounding.
$170,140.61
$172,940.61
$162,440.61
$133,674.0

Answer 1

@ganeshie8

Answer 2

with Roth IRA, you need to pay the tax when u make the yearly payments itself - before retiring

Answer 3

save that for later. first calculate the accumulated amount using FVOA formula

Answer 4

i did that earlier and 180,640.61

Answer 5

\[FVOA = C\bullet \dfrac{(1+i)^{nt}-1}{i}\]

Answer 6

one sec let me check

Answer 7

Yes ! thats the accumulated amount :
http://www.wolframalpha.com/input/?i=%282000*%28+%28%281%2B0.05%29%5E%2835%29-1%29%2F0.05+%29%29

Answer 8

lets see how much tax WAS paid on this

Answer 9

35 years,
that means 35 payments right ?

Answer 10

27,096.09

Answer 11

yes

Answer 12

How did u get that ?

Answer 13

Remember, with Roth IRA , u need to pay the taxes along with yearly payment itself

Answer 14

oh so you have to multiply 35 by the number i got

Answer 15

Here is how we calculate tax for Roth IRA :

total payments = 35
tax percent when working = 0.26
periodic payment = 2000

So tax = 35*0.26*2000

Answer 16

= ?

Answer 17

18,200 but where did the .26 come from?

Answer 18

@ganeshie8

Answer 19

when he was working, what tax bracket he was in ?

Answer 20

26 oh okay so its before they withdrawl @ganeshie8

Answer 21

yup !
so whats the effective money u wil be getting ?

Answer 22

162,440.61

Answer 23

\(\large \color{red}{\checkmark}\)

Answer 24

thank you so much

Answer 25

np :)