A taxpayer is about to receive a $1,000 bonus payment from his employer. He would like to put this bonus into a retirement account. He has come to you for advice as to whether he should put the $1,000 into a traditional deductible IRA or a Roth IRA account. You learn that he faces a current marginal tax rate of 28% and expects to face the same rate in 40 years, when he plans to withdraw the funds at age 70. He expects to earn a pretax rate of return of 10% in either retirement account by investing the funds in corporate bonds. Advise the taxpayer as to what he should do.
A. Roth IRA 1000(1+earnings rate)^40
B. Deductible IRA (1000/(1-tax rate) * (1+earnings rate)^40 * (1-tax rate)