QUESTION 12

You have $3,000 of after-tax income that you invest in a Traditional IRA. Recall that contributions to Traditional IRAs are tax deductible, i.e., you are investing pre-tax dollars. The investment earns a 10% return and you will withdraw the money as a lump-sum in 30 years while in retirement (after age 59.5). Your current marginal tax rate is 30% and your marginal tax rate in retirement will be 20%. How much will be your after-tax withdrawal?

A. $59,827

B. $41,879

C. $74,783

D. $36,644

QUESTION 13

Is it possible for a Traditional IRA to generate a higher after-tax return than a Roth IRA, when both are invested in the same assets? If yes, what condition would lead the Traditional IRA to beat the Roth?

A. Yes. Marginal tax rate when contribute > Marginal tax rate in retirement.

B. No.

C. Yes. Marginal tax rate when contribute = Marginal tax rate in retirement

D. Yes. Marginal tax rate when contribute < Marginal tax rate in retirement