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Roth IRA vs. Traditional IRA

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Title: Roth IRA vs. Traditional IRA Author: Lenovo User Last modified by: rosenkrantz Created Date: 3/9/2010 7:55:41 AM Document presentation format – PowerPoint PPT presentation

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Title: Roth IRA vs. Traditional IRA


1
Roth IRA vs. Traditional IRA
  • Vicente J. Gonzaga
  • Erl Malboeuf
  • Team 6

2
Overview
  • What are IRAs?
  • Roth vs. Traditional
  • The Scenario
  • Analyses and Comparisons
  • Conclusions

3
What are IRAs?
  • IRA Investment Retirement Account
  • Specialized savings accounts specifically geared
    for post-retirement funding
  • Tax features
  • Tax-deductible
  • Tax-deferred
  • Tax -free

4
Choices, Choices
  • So why are we up here?
  • IRAs come in two main flavors
  • 1) Traditional
  • 2) Roth
  • Which one?

5
Roth vs. Traditional
  • Traditional IRA
  • Contributions are tax-deductible
  • 75,000 gross salary
  • Deposit 10 (7,500) into a Traditional
  • (75,000 -7,500)67,500 (new gross income)
  • Cool beans, right?

6
Traditional IRA
  • Contributions are tax-deductible, but withdrawals
    are taxed based on the income bracket they fall
    under
  • Traditional IRAs
  • Tax-deductible contributions
  • Tax-deferred balance growth
  • Taxed withdrawals/distributions

7
Roth IRA
  • Roth IRA
  • Contributions are not tax deductible
  • 75,000 gross salary
  • 75,000 25(75,000)56,250
  • THEN deposit 10 (5,625) into the Roth IRA
  • 5,625lt7500 (from Traditional)
  • Ew right?

8
Roth IRA
  • Contributions are made with after-tax dollars,
    but withdrawals are tax-free.
  • Roth IRA
  • Contributions based on after-tax dollars
  • Balance growth is tax-free
  • Withdrawals/distributions are tax-free

9
Roth and Traditional
  • Important fact to keep in mind
  • Both Roth and Traditional IRAs impose
    contribution caps (equal for both)
  • Caps are adjusted for inflation every few years.
  • For simplicity, we treated cap adjustment as
    continuous
  • These caps greatly affect the dynamics of the
    savings plan given initial conditions.

10
The Pitch
  • You are Yoda (you can live for a very, very long
    time).
  • You have used the force to earn an engineering
    degree and have landed a position with 60,000
    gross annual pay

Long, I live.
11
Major Assumptions
  • Deposits will always be a fixed percentage of
    available income
  • Excess savings (explained later) will go into
    market investment
  • We later neglect excess
  • Assume no pension
  • Tax brackets always apply where appropriate

12
Default Values
  • Starting Gross Salary 60,000
  • Expected Annual Raise8
  • Annual deposit rate 10
  • Applies to available income
  • Deposits between accounts are not equal
  • This is strictly followed
  • Post-retirement Lifestyle 65,000
  • Total years employed 41

13
Default Values
  • Inflation 3.5
  • IRA Caps increase by inflation (3.5)
  • Interest earned on both IRAs 5
  • Market ROR 9.00
  • Retirement Assets ROR 6.00

14
The Reference Parameter?
  • Debt-free years after retirement!
  • How long under each account given equal
    conditions will you last after retirement?

15
Our Goal
  • UNPRECEDENTED , NEEDLESSLY METICULOUSL ACCURACY
  • (Flip to excel file and previous presentation on
    similar topic)

16
Assumptions Made (from a past class presentation)
  • Equal contributions to both plans
  • Roth IRA ineligibility ignored
  • Flat tax (not tiered)
  • Annual salary raises kept up with inflation at 3
  • ROR is 10
  • No 401K matching from employer
  • No Social Security Benefits
  • No investment fees
  • 35 working years

17
Excess Included
18
Excess Included
19
Excess Included
20
Excess Included
21
So Far
  • It looks like Traditional IRA is the better
    choice-
  • But is this the whole story?
  • Remember that weve been including excess savings
    (that have been invested with an ROR of 9.00)
  • Let us now neglect excess savings

22
Excess Is Neglected!
23
Excess Is Neglected!
24
Excess Is Neglected!
25
Excess Is Neglected!
26
The Tables have Turned!
  • So what just happened?
  • Excess Included gt IRA wins
  • Excess neglected gt Roth wins
  • Which one really wins?
  • The answer lies in the circumstances, and may
    change according to certain factors blahblahblah

27
BASICALLY
  • It depends!
  • Traditional IRA won with excess
  • This implies that the Traditional IRA allows for
    more flexibility with extra savings!
  • Roth IRA won when excess was neglected
  • This implies that between the two, Roth IRA has
    the longest staying power based purely on account
    withdrawals!

28
The Bottom Line
  • The Roth IRA is the safer option for people who
    choose to invest extra savings minimally. If left
    to account balance alone, the Roth will outlast
    the Traditional.
  • People who tend to rely on earned interest and
    surefire, small investments should choose the
    Roth.

29
The Other Bottom Line
  • The Traditional IRA allows for creative use of
    large excess savings but does not have as much
    post-retirement staying power as the Roth. It is
    therefore slightly riskier.
  • People who are more confident investors and are
    investment-savvy may benefit more from a
    Traditional IRA, or may find the Traditional more
    appealing.
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