1. Roth IRA vs. Traditional IRA
Vicente J. Gonzaga
Erl Malboeuf
Team 6

2. Overview What are IRAs? Roth vs. Traditional The Scenario
Analyses and Comparisons
Conclusions

3. What are IRAs? IRA = Investment Retirement Account Tax features
Specialized savings accounts specifically geared for post-retirement funding
Tax features
Tax-deductible
Tax-deferred
Tax -free

4. Choices, Choices So why are we up here? IRAs come in two main flavors:
1) Traditional
2) Roth
Which one?

5. Roth vs. Traditional Traditional IRA Cool beans, right?
Contributions are tax-deductible
$75,000 gross salary
Deposit 10% ($7,500) into a Traditional
($75,000 -$7,500)=$67,500 (new gross income)
Cool beans, right?

6. Traditional IRA
Contributions are tax-deductible, but withdrawals are taxed based on the income bracket they fall under
Traditional IRAs
Tax-deductible contributions
Tax-deferred balance growth
Taxed withdrawals/distributions

7. Roth IRA Roth IRA Ew… right? Contributions are not tax deductible
$75,000 gross salary
$75,000 – [25%($75,000)]=$56,250
THEN deposit 10% ($5,625) into the Roth IRA
$5,625<$7500 (from Traditional)
Ew… right?

8. Roth IRA
Contributions are made with after-tax dollars, but withdrawals are tax-free.
Roth IRA
Contributions based on after-tax dollars
Balance growth is tax-free
Withdrawals/distributions are tax-free

9. Roth and Traditional Important fact to keep in mind:
Both Roth and Traditional IRAs impose contribution caps (equal for both)
Caps are adjusted for inflation every few years.
For simplicity, we treated cap adjustment as continuous
These caps greatly affect the dynamics of the savings plan given initial conditions.

10. The Pitch You are Yoda (you can live for a very, very long time).
You have used the force to earn an engineering degree and have landed a position with $60,000 gross annual pay
“Long, I live.”