Question

Check my work?

Answer 1

Leon started making contributions to a Traditional IRA when he got his first job, at age 36. His contributions averaged $1,900 annually. Leon was in the 35% tax bracket during his working years, when he continued to make these annual contributions. The average annual rate of return on the account was 6.1%. Upon retirement at age 64, Leon stopped working and making IRA contributions. Instead, he started living on withdrawals from the retirement account. At this point, Leon dropped into the 25% tax bracket. Factoring in taxes, what is the effective value of Leon’s Traditional IRA at retirement? Assume annual compounding.
$122,607.14
$173,536.23
$86,013.62
$99,246.49

Answer 2

64 - 36 = 28
Using the formula
(1 + i)^nt - 1
FVOA = C x ---------------
i

Plug in the values and you end up with

(1.061)^28 - 1
1,900 x -------------------
0.61

We can decide that the answer before subtracting the taxes is
132,328.65.

Subtract the taxes by doing


132,328.65* % =

Answer 3

Because he dropped into the second tax bracket (25%)

The final answer should end up being 99,246.49

Answer 4

I'll leave you in mathmates capable hands. i hate these money problems!

Answer 5

Me too ;P

Answer 6

@rockinhood
You have correctly obtained the financial part of the question, namely,
FV=C((1+i)^n-1)/i
where FV=future value, C=annual contribution, and i=0.061, which gives
FV(at age 64)=132328.652

The tax treatment part appears to be simple as well.

At retirement, withdrawal will entail an income tax of 25%.
On this basis, for every dollar he withdraws, he ends up with only $0.75 to spend. So we could reasonably say that the FV would be reduced by 25%, which means
Adjusted FV=132328.652*0.75=99246.490

HOWEVER, there is another point to consider.
Marginal bracket or effective/average rate?
If the IRA is his only source of income, then there are deductions, and perhaps also a lower bracket which mean that he will not be paying tax at 25% for his full withdrawal, but less. In that case, the adjusted FV will be greater than 99247.49, but we don't know by how much.

Answer 7

Those points would be valid if it weren't for school, but they just want the general answer.

Thanks so much!!

Answer 8

You're welcome! :)