Martha Stewart earns $4,000 and she wants to save it for retirement, which is 10 years away. She can either save it in a taxable account or put it into a Roth IRA. Suppose that Martha can receive an annual rate of return of 8 percent and her marginal tax rate is 25 percent. By the time she reaches retirement, how much money would she have in either option? NOTE: Martha has to pay tax on the $4,000, so she cannot put the full amount into either the taxable account or the Roth.
What will be an ideal response?
Roth IRA: $4,000(0.75) = $3,000, then $3,000(1.08) 10 = 6,476.77.
Traditional IRA: $4,000(.75) = $3,000 then $3,000(1.08) 10 = 6,476.77, then $6,476.77(0.75) =
$4,857.58.
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