In this chapter, you learned the importance of tax avoidance. One of the simplest tax avoidance strategies is to contribute to a Roth IRA, although this may not be right for everyone. Some individuals, particularly low-income households that may be eligible for tax credits because of young children in the home, may benefit more from contributions to a traditional IRA. Here, you want to help Paula identify the best retirement savings option for her situation. Paula is 25, single, and makes $40,000 a year. Paula does not have access to an employer-sponsored retirement plan, but she really wants to start saving for retirement. She can contribute $5,000 of pretax money to a traditional IRA, or she can contribute $4,400 of after-tax money to a Roth IRA. The $600 difference represents the tax that Paula has to pay. Assume Paula continues to make this same annual contribution for 30 years and earns 9% on her investment. 1- Use the time value of money (TVM) formulas to calculate what the future value will be and how much she will have after taxes are paid in retirement by completing the following table. 2- Assuming that Paula continues to save aggressively for retirement and accumulates enough retirement wealth so that she will be in the 22% tax bracket in retirement, which option is better for Paula, a traditional IRA or Roth IRA? Tax Information Traditional IRA Roth IRA Money available to save $5,000 $5,000 Tax on money available to save $0 $600 Net annual contributions $5,000 $4,400 Number of years contributions are made 30 30 Future Value at 9% ? ? Retirement tax rate 22% 0%, qualified Roth IRA distributions are tax-free Tax ? ? After-tax wealth ? ?