Question: Imagine that, given your current age and marital status, you have decided to make the maximum contribution to an individual retirement arrangement (IRA) each year from now until age 65. (Assume that the current maximum contribution rate will remain unchanged over this period.) You expect to earn a 10% annual rate of return on IRA investments and are subject to a 30% tax rate.
a. Determine how much you will have in the IRA account at age 65 if you can earn 10% on IRA investments and IRA contributions are
1. deductible.
2. nondeductible.
b. How much better off would you be as a result of having a traditional deductible IRA rather than a nondeductible IRA? What, if any, tax benefit does a nondeductible IRA offer?
c. Describe and justify the overall investment strategy you would employ on your IRA investments.
d. What specific types of vehicles would you include in your IRA investment portfolio? Justify your choices.
e. Compare and contrast the traditional deductible IRA to (1) a 401(k) plan and (2) a Keogh plan. If you could contribute to only one of these plans, which would be preferable? Why?