Question

Ashton made contributions to a Roth IRA over the course of 32 working years. His contributions averaged $2,400 annually. Ashton was in the 28% tax bracket during his working years. The average annual rate of return on the account was 8%. Upon retirement, Ashton stopped working and making Roth IRA contributions. Instead, he started living on withdrawals from the retirement account. At this point, Ashton dropped into the 15% tax bracket. Factoring in taxes, what is the effective value of Ashton's Roth IRA at retirement? Assume annual compounding.

1)
$330,608.49


2)
$300,608.49


3)
$310,592.49


4)
$231,920.99

Can someone tell me how to solve this?

Answer 1

The formula of the future value of an annuity ordinary is
Fv=pmt [(1+r)^(n)-1)÷r]
Fv future value?
PMT 2400
R 0.08
T 32 years
Fv=2,400×((1+0.08)^(32)−1)÷(0.08)
Fv=322,112.49
Now deducte 28% the tax bracket from the amount we found
annual tax 2,400×0.28 =672 and tax over 32 years is 672×32 =21,504. So the effective value of Ashton's Roth IRA at retirement is 322,112.49−21,504=300,608.49