Alton is 60-years-old and plans to fully retire in ten years. He has contributed to a traditional IRA for several years, and it now has a $150,000 balance. All of his contributions were deductible. Alton is considering converting the traditional IRA to a Roth IRA. He will pay any taxes due from a money market account he holds outside the IRA. The money market account earns a 5% after-tax rate of return. The IRA earns an 8% before-tax rate of return. Assume Alton's marginal tax rate is currently, and will remain at, 20%. He plans to withdraw the full balance from the IRA in ten years to buy a new house. Calculate the after-tax accumulation assuming he (1) retains the existing traditional IRA and (2) converts to the Roth IRA.
What will be an ideal response?
Retain Existing Traditional IRA:
ATA = $150,000(1.08)10 - 0.20[$150,000 (1.08)10] = $259,071
Convert to Roth IRA:
CTk = 0.20($150,000) = $30,000
ATA = $150,000(1.08)10- $30,000(1.05)10 = $210,204
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