Team 11 Personal Investment  Puneet Chhina - Organizer  Tommy Lu – Technical  Zan Tang - Summarizer

Scenarios Scenario 1 Scenario 1 –Roth IRA Scenario 2 Scenario 2 –401K (No Matching contribution) Scenario 3 Scenario 3 –401K ( Matching contribution)

Assumptions Age 25 Age 25 Starting Salary $50,000 Starting Salary $50,000 Salary Raise 4% per yr Salary Raise 4% per yr Same employer for the duration of employment. Same employer for the duration of employment. Retirement Age 65yr Retirement Age 65yr Marital Status: Single. Marital Status: Single.

Roth IRA Vs. 401K Contribution - $3000 (2005) Contribution - $3000 (2005) After-Tax Contribution After-Tax Contribution No Employer Matching No Employer Matching Wide Number of Investment choices Wide Number of Investment choices Contribution - $14000 (2005) Contribution - $14000 (2005) Pre-Tax contribution-Lower Tax Bracket Pre-Tax contribution-Lower Tax Bracket Employer Matching- 6% Employer Matching- 6% Limited Number of Investment choices Limited Number of Investment choices

Roth IRA Vs. 401K continued…. Can withdraw contributions at anytime. Can withdraw contributions at anytime. Penalty free withdrawals. Penalty free withdrawals. No madatory withdrawals No madatory withdrawals Can not withdraw contributions until 59.5yrs. Can not withdraw contributions until 59.5yrs. Limited loan availability – double interest. Limited loan availability – double interest. Withdrawals must start at 70.5yrs Withdrawals must start at 70.5yrs

Roth IRA Vs. 401K continued…. Limited Creditor protection varies by state. Limited Creditor protection varies by state. No taxes on investments earned. No taxes on investments earned. Full Creditor Protection-Federal law Full Creditor Protection-Federal law Principle contribution and investments taxed at withdrawal. – Higher tax bracket Principle contribution and investments taxed at withdrawal. – Higher tax bracket

Sensitivity Analysis Case 1: Case 1: –Contributions for Roth IRA, 401K and 401K plan with Employer matching is equivalent. Ceiling – Roth IRA –Fixed Input –Employer Matching 25cents to a dollar. –Uniformly used 8% interest earned

Case 1

Sensitivity Analysis Case 2: Case 2: –Maximum allowed contribution for all plans –Neither Fixed Input or Fixed Output –Employer matching 25 cents to a dollar. –Interest ( Real world scenario) Roth IRA – 10% Roth IRA – 10% 401K and 401K Matched – 7% 401K and 401K Matched – 7%

Case 2

Suggestion If (Employer Matches 401k) If (Employer Matches 401k) { 1. Max out your 401K plan 1. Max out your 401K plan 2. Put additional investment in Roth IRA 2. Put additional investment in Roth IRA } Else Else { 1. Max out your Roth IRA plan 1. Max out your Roth IRA plan 2. Put additional investments in 401K plan. 2. Put additional investments in 401K plan. } End End

Resources Internet: Internet: – – – Books: Books: –Essentials of Engineering Economic Analysis, Newnan, D. G., Engineering Press, 2nd Ed Financial Consultant: Financial Consultant: –Dr. Phillip R. Rosenkrantz