Vicente J. Gonzaga Erl Malboeuf Team 6

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

 IRA = Investment Retirement Account  Specialized savings accounts specifically geared for post-retirement funding  Tax features  Tax-deductible  Tax-deferred  Tax -free

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

 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?

 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  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?

 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

 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.

 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.”

 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

 Starting Gross Salary: $60,000  Expected Annual Raise=8%  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

 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%

 Debt-free years after retirement!  How long under each account given equal conditions will you last after retirement?

 UNPRECEDENTED, NEEDLESSLY METICULOUSL ACCURACY  (Flip to excel file and previous presentation on similar topic)

 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

 It looks like Traditional IRA is the better choice-  But is this the whole story?  Remember that we’ve been including excess savings (that have been invested with an ROR of 9.00%)  Let us now neglect excess savings

 So what just happened?  Excess Included => IRA wins  Excess neglected => Roth wins  Which one really wins?  The answer lies in the circumstances, and may change according to certain factors blahblahblah…

 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!

 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.

 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.