4. You are in the 25 percent income tax bracket. What are the taxes owed or saved if you
a) Contribute $2,000 to a 401(k) plan Amounts contributed are not subject to taxes so 2000*.25 = $500 tax savings
b) Contribute $2,000 to a Roth IRA No deduction for ROTH IRA contributions. No tax owed or saved.
c) Withdraw $2,000 from a traditional IRA IRA withdrawals are taxable. $2000*.25 = $500 tax due
d) Withdraw $2,000 from a Keogh account Keogh withdraws are taxable $2000 * .25 = $500 tax due
5.
Ans a) How much will you have when you start to make withdrawals at age 70?
For $60,000 that $10,000 invested in an IRA and $50,000 from a pension plan we get compound interest of 9% for 10 years so after 10 years.
Year Year Interest Total Interest Balance
1 $ 5,400.00 $ 5,400.00 $ 65,400.00
2 $ 5,886.00 $ 11,286.00 $ 71,286.00
3 $ 6,415.74 $ 17,701.74 $ 77,701.74
4 $ 6,993.16 $ 24,694.90 $ 84,694.90
5 $ 7,622.54 $ 32,317.44 $ 92,317.44
6 $ 8,308.57 $ 40,626.01 $ 100,626.01
7 $ 9,056.34 $ 49,682.35 $ 109,682.35
8 $ 9,871.41 $ 59,553.76 $ 119,553.76
9 $ 10,759.84 $ 70,313.60 $ 130,313.60
10 $ 11,728.22 $ 82,041.82 $ 142,041.82
And for $2,000 annual payments to the regular IRA at 9% we will get Future Value of an Annuity..
i.e. we get future value of annuity is $30,943.50
FV of annuity = P[(1+r)^n-1/r] =2000[(1+9%)^10-1/10%] =$30,943.50
The total amount we get after 10 years = $142,041.82 + $30,943.50 = $172,985.32
Ans b) Here FV is the future value of the account, which had an initial amount A. The account pays interest at rate r. The owner of the account has made n withdrawals, each one equal to w. This leads us to the question that if a person has a nest egg A from which he regularly withdraws w per month, how long will it take him to exhaust his savings:
N= ln(w/(w-Ar))/ln(1+r)
N=ln(17,000/(17,000-172,985.32*9%))/ln(1+9%)
N=28.7
Ans