Question

You are an astronaut on a deep space mission. You are in suspended animations for 40 years before you return to earth. Your parents have died, but, since you were the favorite son (since you were an astronaut and all), they left you first choice over your ne'er-do-well brother, Sigmund. Your choices are your parent's Roth IRA or their traditional IRA. The Roth IRA has $2 million in it. The traditional IRA has $2.5 million in it. Your income is well within the 30% tax bracket and you are old enough to withdrawl the money without penalty. Assume that you will withdrawl all the money at once. Which IRA would you choose and why?

Answer 1

Answer:

you should choose the Roth IRA

Explanation:

we have to calculate after tax return in order to determine which option is better:

• traditional IRA account: after tax return = $2,500,000 x (1 - 30%) = $1,750,000
• Roth IRA account: after tax return = $2,000,000, since Roth IRA's distributions are tax free

Roth IRA contributions are not tax deductible, that is why their distributions are tax free. While traditional IRA contributions are tax deductible, that is why their distributions are taxed at marginal tax rate.