Yuki (age 45 at year-end) has been contributing to a traditional IRA for years (all deductible contributions)

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Yuki (age 45 at year-end) has been contributing to a traditional IRA for years (all deductible contributions) and her IRA is now worth $50,000. She is trying to decide whether she should roll over her traditional IRA into a Roth IRA. Her current marginal tax rate is 25%. She plans to withdraw the entire balance of the account in 20 years and she expects to earn a before-tax rate of return of 5% on her retirement accounts and a 4% after-tax rate of return on all investments outside of her retirement accounts. For each of the following alternative scenarios indicate how much more or less Yuki will accumulate after taxes in 20 years if she rolls over her traditional IRA into a Roth IRA. Be sure to include the opportunity cost of having to pay taxes on the rollover.
a. When she withdraws the retirement funds in 20 years, she expects her marginal tax rate to be 35%.
b. When she withdraws the retirement funds in 20 years, she expects her marginal tax rate to be 20%.
c. Assume the same facts as in b. except that she earns a 3% after-tax rate of return on investments outside of the retirement accounts?
d. In general terms, reconcile your answer from part b. with your answer to part c.
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Taxation Of Individuals And Business Entities 2015

ISBN: 9780077862367

6th Edition

Authors: Brian Spilker, Benjamin Ayers, John Robinson, Edmund Outslay, Ronald Worsham, John Barrick, Connie Weaver

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