A. You are about to receive a bonus from your employer that is $4,000 before being taxed at your tax rate, which is 25%. You would like to put this bonus, after any applicable taxes, into a retirement account. You wonder whether you are better off using a traditional deductible IRA or a Roth IRA. You expect to earn a pretax rate of return of 10% in either retirement account. You expect to face the same tax rate in 40 years. After you withdraw the funds in 40 years, how much will you have after-tax in each alternative? Traditional IRA? Roth IRA?

B. Continuing with A above, you consider a second alternative. Instead of putting your bonus in an IRA, suppose you put it, after any applicable taxes, in a taxable brokerage account, where you invest in a stock that pays no dividends but appreciates at a 10% rate per year. At the end of the 40 years, you sell the stock and pay tax at a 20% capital gains rate. How much will you have after-tax with this alternative? Taxable brokerage, non-dividend stock?

C. Continuing with A above, you consider a third alternative. Instead of putting your bonus in an IRA, suppose you invest in a business operated by your friend, Chotchkies LLC, which is taxed as a partnership. Specifically, you acquire equity in Chotckies (technically called a membership because it is an LLC), which generates a 12% pretax return per year. Assume Chotckies is a fairly simple business, such that its ordinary business income for tax purposes each year equals its pretax return. Assume Chotckies makes cash distributions each year equal to one-fourth of its pretax return and reinvests the rest to in the business. At the end of the 40 years, assume that Chotckies liquidates. Because Chotckies is taxed as partnership, assume no tax on the liquidation. How much will you have after-tax with this alternative? Investment in Chotckies LLC?

D. Reconsider A above, assuming instead that you expect your tax rate to be 20% when you retire in 40 years. How much do you have after-tax in each alternative? Traditional IRA? Roth IRA?