The Taxpayer Relief Act of 1997 Created the Roth IRA,which

question 20

Essay

The Taxpayer Relief Act of 1997 created the Roth IRA,which permits qualifying individuals to make after-tax retirement contributions of up to $2,000 annually.Contributions to a Roth IRA are not tax-deductible,but no taxes are paid on earnings generated from a Roth IRA.In contrast,contributions made to traditional IRAs are tax-deductible,but individuals will pay taxes on all future distributions.In short,investors using the Roth IRA make contributions that have already been taxed and have earnings that grow tax-free,while those using the traditional IRAs defer taxes until funds are withdrawn.Consider an individual who is five years away from retirement and will need to withdraw all her retirement funds at that time.She has $2,000 in pretax income to allocate each year to a retirement plan,faces a fixed tax rate of 15 percent now as well as at retirement,and anticipates a stable 8 percent return on her investments.She can set up a Roth IRA for a one-time,up-front fee of $10,or she can set up a traditional IRA for free.Which option should she choose?

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Definitions:

Depressant

A drug that reduces the functioning of the nervous system, often prescribed to reduce anxiety and induce sleep.

Tranquilizers

are medications used to reduce anxiety, tension, and agitation by depressing the central nervous system.

Prozac

A brand name for fluoxetine, a medication commonly prescribed to treat depression, obsessive-compulsive disorder, and anxiety.

Activation-Synthesis

A theory suggesting that dreams result from the brain's attempts to make sense of random and internally generated neural signals during REM sleep.