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

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

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

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

Roth vs. Traditional Traditional IRA Cool beans, right? 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?

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

Roth IRA Roth IRA Ew… right? 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 $5,625<$7500 (from Traditional) Ew… right?

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

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.

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.”