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Homework answers / question archive / The Taxpayer Relief Act of Country A created the Roth IRA (A Roth IRA is an individual retirement account (IRA) that allows qualified withdrawals on a tax-free basis provided certain conditions are satisfied
The Taxpayer Relief Act of Country A created the Roth IRA (A Roth IRA is an individual retirement account (IRA) that allows qualified withdrawals on a tax-free basis provided certain conditions are satisfied. Established in 1997, it was named after William Roth, a former Delaware Senator), which permits qualifying individuals to make after-tax retirement contributions of up to $2,000 annually. Contributions to a Roth IRA are not tax-deductible, but no taxes are paid on earnings generated from a Roth IRA. In contrast, contributions made to traditional IRAs (a traditional IRA (individual retirement account) allows individuals to direct pre-tax income toward investments that can grow tax-deferred) are tax-deductible, but individuals will pay taxes on all future distributions. In short, investors using the Roth IRA make contributions that have already been taxed and have earnings that grow tax-free, while those using the traditional IRAs defer taxes until funds are withdrawn. Consider an individual who is five years away from retirement and will need to withdraw all her retirement funds at that time. She has $2,000 in pretax income to allocate each year to a retirement plan, faces a fixed tax rate of 15 percent now as well as at retirement, and anticipates a stable 8 percent return on her investments. She can set up a Roth IRA for a one- time, up-front fee of $10, or she can set up a traditional IRA for free. Which option should she choose?
Roth IRA retirement account will help the individual with complete tax-free future withdrawals. If an individual feels her taxes are going to be higher in retirement than now, then Roth IRA is the best option. Comparing the traditional individual retirement plan where the contributions will have the benefit of tax-deduction option but you have to pay the tax upon withdrawals in the future, the Roth IRA contributions are not tax-deductible but there will not be tax once you start withdrawing funds.
IRA is possible when one can pay a sizeable contribution towards the account during the service and after retirement.
Since the individual here still has five years for retirement, she has time to boost her retirement savings. This corpus can give good financial and emotional safety. Since she can part away $2000 yearly towards retirement plan and the return on her income from the investment is 8% which is lesser than the 15% tax she has to pay, she has to focus on decent income being safeguarded for the present than for future. Considering this, a traditional IRA will be most suitable for her so that she can have a decent livelihood from the income after tax and income tax returns.
