Harry wants to contribute either $5,500 (BT$) to a traditional deductible IRA or $5,500 (AT$) to a Roth IRA. His current tax rate is 30% for ordinary income and 15% for capital gains. He expects his IRA investment to earn a 12% BTROR, and he plans to withdraw the IRA accumulation in 25 years, at which time he will be over age 59 ½. If he contributes to a deductible IRA, he will invest the tax savings from the deduction in a nondividend paying stock that he expects to grow at a 12% BTROR. Harry will sell the stock at the same time he withdraws the IRA accumulation.
a. Compare the two alternatives assuming that, at the time of withdrawal, Harry’s tax rate will be 30% for ordinary income and 15% for capital gains.
b. Compare the two alternatives assuming that, at the time of withdrawal, Harry’s tax rate will be 15% for ordinary income and 0% for capital gains.