Suppose one of your clients is four years away from retirement and has only $2,500 in pretax income to devote to either a Roth or traditional IRA. The traditional IRA permits investors to contribute the full $2,500 since contributions to these accounts are tax-deductible, but they must pay taxes on all future distributions. In contrast, contributions to a Roth IRA are not tax deductible. For example, if a person tax rate is 25 percent, an investor is able to contribute only $1,875 after taxes; however, investors opening a traditional IRA must pay the $50 setup fee. Assuming that your client anticipate that her tax rate will remain at 19 percent in retirement and she will earn stable 7 percent return on her investments, will she prefer a traditional or a Roth IRA?
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Suppose one of your clients is four years away from retirement and has only $2,500 in pretax income...
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