Question

(Retirement Savings Plans MC)

An employee is 10 years from retirement and has decided to begin making $2,000 annual contributions into an IRA. The employee is currently in the 33% tax bracket but expects to be in the 15% tax bracket at retirement.

Which of the following contains the better choice with the correct reasoning?

The Traditional IRA is the better choice because the employee will be taxed at a lower rate on lower earnings in retirement than during employment.
The Roth IRA is the better choice because the employee will be taxed at a lower rate on lower earnings during employment than in retirement.
The Traditional IRA is the better choice because the employee will be taxed at a higher rate on lower earnings in retirement than during employment.
The Roth IRA is the better choice because the employee will be taxed at a higher rate on lower earnings during employment than in retirement.

Answer 1

The Roth IRA is the better choice because the employee will be taxed at a lower rate on lower earnings during employment than in retirement.

Roth IRA vs. Traditional IRA: In a Roth IRA, contributions are made with after-tax dollars, meaning taxes are paid upfront. Conversely, in a Traditional IRA, contributions are made with pre-tax dollars, and taxes are paid upon withdrawal during retirement.Tax Brackets: The employee is currently in the 33% tax bracket but expects to be in the 15% tax bracket at retirement. This implies that the employee's current tax rate is higher than the expected tax rate during retirement.Impact on Taxes: By choosing a Roth IRA, the employee pays taxes on the $2,000 annual contributions at the current higher tax rate (33%). However, during retirement, withdrawals from the Roth IRA, including earnings, are tax-free since taxes were already paid upfront. This means that in retirement, when the tax rate is lower (15%), the employee won't pay any additional taxes on withdrawals.Comparison: If the employee were to choose a Traditional IRA, they would get a tax deduction on their contributions at the current higher tax rate (33%). However, during retirement, withdrawals would be taxed at the expected lower tax rate (15%). This would result in paying taxes at a lower rate on lower earnings during retirement, which might not be as advantageous as paying taxes upfront at a higher rate with a Roth IRA.Therefore, the Roth IRA is the better choice because the employee will be taxed at a lower rate on lower earnings during employment than in retirement, making the Roth IRA more beneficial in this scenario.

Answer 2

awsome :)

Answer 3

np