Team 5 – Personal Investing Edward Gribble – Organizer Irving Lim – Techie Richard Vasquez – Summarizer EGR Fall 2005

Scenarios Invest money into a Roth IRA. Invest money into a Traditional IRA. Invest money into a 401k account through employer. Which is more beneficial using the Future Value analysis method?

Background Traditional IRA  Individual Retirement Arrangement or Account  A tax-advantaged arrangement that allows earnings and deductible contributions to grow tax-deferred. Roth IRA  Started in 1998 as result of the Taxpayer Relief Act of Senator William V. Roth, Jr. 401K  Started in 1978 as a result of Congress encouraging Americans to save money for retirement.  Requires employment with a company that has a 401k program.

Assumptions 25 years old. $60,000 Starting salary. 5% annual contribution. Retirement at age 65. $25,000 emergency withdrawal at age % rate of return on investments. Salary increases 10% every 5 years for the first 25 years. Employer does not contribute to 401k. Pre-retirement tax: 28% -- Post-retirement tax: 25%

Cash Flow Diagram n = 41 years i = 10% A 1-6 = 5% of salary Emergency Withdrawal Total Savings A1A1 A2A2 A3A3 A4A4 A5A5 A6A6

Sensitivity Analysis (ROR)

Sensitivity Analysis (Starting Salary)

Sensitivity Analysis (Emergency Withdrawal)

Sensitivity Analysis (Percent of Salary Contributed)

Sensitivity Analysis (Percent Salary Raise)

Conclusions A 401k plan will always be the most beneficial plan, but you must have a job which gives you this option. A Roth IRA is, for all scenarios that we analyzed, the next best option. If your employer contributes to your 401k plan, 401k is EASILY the best option.

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