You areconsidering depositing $5000 now (i.e. at time t=0) into an IRAaccount that you plan on taking out 40 years from today. Given anincome tax rate of 25% and guaranteed rate of return of 5% compounded annually:
(A)Roth IRA: Compute the Amount that you would beable to withdrawal at the end of the 40 years if you invested the$5000 in a Roth IRA Account today:
(B)Traditional IRA: If you assume that the $5000 istax deductible (i.e. you claim it on your 1040 income tax formtoday), assume that you will invest (today) the $1250 you saved intaxes in a taxable account (where any interest income is taxed at25% per year). If you take into account the $5000 you put in thetraditional IRA and the $1250 you invested in the account that issubject to interest income being taxes at 25% per year, compute thetotal amount that you would be able to withdrawal at the end of the40 years (assume that the IRA account withdrawals are taxed at 25%while the taxable account withdrawals are not taxable):
(C) Which investment would you choose to make today (A or B)?
(D) If the income tax rate dropped to 20% (instead of25%) after 10 years from today, which investment would bethe better investment?