Question

Fletcher, age 65, works at Fenton Ford where he earns $90,000. Fletcher is single. How much may he contribute to his Roth IRA?

a.) $0
b.) $6,000
c.) $3,000
d.) $7,000

Answer 1

Fletcher can contribute up to $7,000 to his Roth IRA since he is over 50 and earns less than the income limit. For Ford's bond, they are paying a 3% interest rate. (option d)

Step-by-step explanation:

Fletcher, age 65, can contribute up to $7,000 to his Roth IRA. Individuals who are age 50 or older are allowed to make catch-up contributions, which means that they can contribute an additional $1,000 over the standard contribution limit of $6,000 for tax year 2023. Since Fletcher's income of $90,000 is below the Modified Adjusted Gross Income (MAGI) limits for a single filer for Roth IRA contributions, he can make the full catch-up contribution.

Now let's address the secondary information given about Ford Motor Company's bond, which seems unrelated to Fletcher's Roth IRA query but involves its own financial concepts. Specifically:

The interest rate Ford is paying on the borrowed funds would be the annual coupon payment ($150) divided by the face value of the bond ($5,000), which is 3%.

If the market interest rate rises to 4% a year after Ford issues the bonds, the value of the bond decreases. This is because new bonds would be issued at the higher interest rate, making the existing bonds with the lower interest rate less attractive to investors.