Understanding 401(k) and IRAs Student’s Name Institutional Affiliation:

CONTENT ARRANGEMENT This slide show has the following parts 1.Difference between Traditional and Roth IRA 2.Income tax bracket determination 3.Mutual fund 4.401(K) Retirement Plan

DIFFERENCE BETWEEN TRADITIONAL AND ROTH IRA Traditional and Roth Individual Retirement Accounts may be differentiated based on point in time when income tax is deducted as shown in next slide

TRADITIONAL IRA Traditional Individual Retirement Arrangement (IRA):-Contributions are not in any way subject to current income tax and investment earnings also accumulate tax differed.taxes is paid in the year employee is paid retirement benefit(Treasury Inspector General for Tax Administration,2010)

ROTH IRA Roth IRA: income taxes are usually paid on the contribution in the year contribution is made while earnings from savings and investment grow tax-free. Any withdrawals of funds from the plan is never taxed at all

Mr. William frog (aged 35) who has a marginal current federal income tax rate of 30 percent per year. Mr. William frog decides to save a onetime lump sum amount of USD $3,500 towards retirement at the end of age 65 in an ……….. next two slide shows growth of fund under Traditional and Roth IRA Case Study: Saving on a Pretax (i.e. Roth IRA) versus an After- tax Basis (i.e. traditional IRA)

SAVINGS UNDER TRADITIONAL IRA IN 30 YEARS UP TO RETIREMENT Amount saved in a years time Details Amount(US $) Amount contributed 3,500 Plus 6 % compound interest rate per year 210 Amount saved after one year 3,750 Amount saved in 30 years time Amount saved after 30 years =$3,500[1+0.06] 30 Amount saved in 30 years =$20, Less income tax= ( $6,030.66) Net amount saved after income tax in 30 years $14,071.55

SAVINGS UNDER ROTH IRA IN 30 YEARS UP TO RETIREMENT Savings in a years time Details Amount(US $) Amount contributed 3,500 Minus income tax of 30% (1,050) Amount contributed in a year 2,450 Plus 6% interest rate per year 147 Subtotal 2,597 Minus income tax on interest earned (44.10) Amount saved after one year 2, Savings in 30 years Amount saved after 30 years =$2,450[1+0.06] 30 -(44.10 x30) Amount saved in 30 years = $(14, ,323) net amount saved after income tax in 30 years $

INCOME TAX BRACKET DETERMINATION Income tax determination depends on the marital status and the way tax is filed as follows  Filing for married people separately  Filing for married people jointly  Filing for family breadwinner  And filing for single people ………… next three slides shows a Case of married people filing jointly

A CASE OF TAX FILING FOR MARRIED PEOPLE FILLING JOINTLY Suppose a family's taxable income after deductions and exemptions are equal to USD $100,000 in 2014 ……. the next two slide shows table for tax income bracket and calculations of amount of tax payable by this family

TAX STATUS FOR MARRIED PEOPLE FILING JOINTLY Taxable income BracketTax bracket(%) $0-18, ,150-73, , , , , , , , , ,600 and above39.6

CALCULATION OF TAX PAYABLE incomeTax rate Amount of tax 18,150 minus $ 1, ,800 minus 18, , ,000 minus 73, ,550.0 total $ 16,712.5

MUTUAL FUND Mutual Funds are an investment opportunity that gives medium and small investors opportunity to invest in a professionally managed portfolio that is well diversified. The portfolio may be composed of stock, bonds and other financial assets …………………… the next three slides shows a case of mutual fund in New York Stock Exchange

A CASE OF PIMCO TOTAL RETURN FUND Pimco Total Return Fund is a mutual fund that is operating in the United States of America. The fund has invested in securities traded in New York stock exchange (NYSE).The mutual fund has invested in fixed-income financial assets portfolio.

Continuation ……………..If average portfolio duration is normally varies from 3 to six year's period. Assume investor uses six year average returns of 6.04 % and that USD 3,500 is invested in Pimco Total Return Fund mutual fund for 30 years without withdrawing.The fund will grow as illustrated in next slide

Yield to maturity = A (1+R) n Where A is the initial amount invested R is interest rate per year n is the time to maturity when total amount is withdrawn A= USD $3,500( ) 30 3,500(1.604) 30 3,500(5.808) 20, CALCULATION OF SAVINGS UNDER PIMCO TOTAL RETURN FUND IN 30 YEARS

401(k) In a 401(k) a plan, employees have an individual account to which employee, employer, or both make contributions towards the account. Benefits of 401(k) contribution is exempted from current income tax. earnings on balances grow at deferred rate Employer is required to make a contribution towards the the employer receives a tax deduction at the time contributions are made to the plan, 401(K) RETIREMENT PLAN

The ceiling of contributions by a person towards 401(k) plan is limited every year by the IRS. According to (Perez, 2014), the limit of contribution towards 401(k) plan for year 2013 and 2014 has been set up to $17,500 as an elective salary deferral to a 401(k) plan. In addition, if a person’s age is 50 or more, they are to contribute an additional make-up contribution of USD $5,500 LIMITATIONS OF 401(K)

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