Roth vs Traditional Investment Examples - CMU
Roth vs. Traditional Investment
This is an example of how personal contributions to a retirement account can provide tax savings under either pretax or a post-tax Roth Account.
Contributes to a
Roth Account
Contributes to a
Traditional TDA
$30,000
$30,000
$0
$6,000 ($500/month)
Taxable Income
$30,000
$24,000
Federal taxes paid annually*
$7,500*
$6,000*
$6,000 ($500/month)
$0
16,500
18,000
$474,349**
$474,349**
$0
$71,152*
$474,349
$403,197
Annual Income
Pre-Tax Retirement
Contributions
Post-Tax Retirement
Contributions
Pay after Federal Taxes
Total Retirement Savings After
30 Years**
Federal taxes owed at
withdrawal*
Take-Home Retirement Savings
*Based on a federal tax withholding rate of 25% while working and 15% in retirement.
**Based on a contribution rate of $6,000 per year, and 6% annual return rate.
The individual who contributed to a traditional pre-tax account saved $45,000 in taxes over 30 years ($7,500$6,000= $1,500 * 30 years). However, at retirement this individual will owe $71,152 in taxes on their retirement
income. Over a lifetime, the individual who contributed to the Roth account will have paid $26,152 ($71,152$45,000) less in taxes, and will have a smaller tax obligation in retirement.
Why would an individual contribute to a pre-tax as opposed to a Roth account?
In this example, contributing to the traditional pre-tax account saves $1,500 per year ($125 per month), which is
additional disposable income. These immediate tax savings may have been the reason the individual could afford to
contribute $500 per month.
Another example: if this individual could not afford to have disposable income of less than $18,000 per year, which
equates to contributing $375 per month into a Roth account, the total retirement savings after 30 years would be
more than $120,000 less than someone who had put aside $500 per month. This additional money is significant
when compounding interest is factored in the equation. The additional savings made possible by using pre-tax
dollars is significantly more than the taxes owed in retirement for this individual.
What are your circumstances?
Obviously, there are many factors to consider when deciding whether to invest in a Roth or traditional pre-tax
account. Your current tax rate and your anticipated tax bracket in retirement, the amount you can afford to
contribute under each kind of plan, the number of years you have until retirement, and other factors all alter the
figures for your situation. Contact a TIAA professional, or a financial advisor, to help you determine the best
investment option for you.
................
................
In order to avoid copyright disputes, this page is only a partial summary.
To fulfill the demand for quickly locating and searching documents.
It is intelligent file search solution for home and business.
Related download
- t rowe price roth ira conversion worksheet
- capitalizing on employee 401 k and ira contribution questions
- 457 401k spd welcome to city of new york
- 401 k and 457 plans handbook
- comparing programs welcome to
- state by state analysis of iras as exempt property roth
- 401k self employed owner only business fidelity
- roth vs traditional investment examples cmu
- qps plan comparison chart
- helping you achieve financial fitness
Related searches
- online vs traditional education essay
- online classes vs traditional classes
- online vs traditional education arguments
- online learning vs traditional learning
- online schooling vs traditional schooling
- online vs traditional classes
- online vs traditional education article
- online school vs traditional school
- online vs traditional education statistics
- online classes vs traditional classes essay
- online education vs traditional education
- online classrooms vs traditional classroo