ExpertMedium1 markMultiple Choice
CPA · Question 08 · Area I: Individual Compliance and Planning
A taxpayer is deciding between contributing to a Traditional IRA or a Roth IRA in Year 1. They are in the 24% marginal tax bracket in Year 1 and expect to be in the 35% bracket in retirement. The contribution amount is $7,000. Assuming the investment grows at the same rate in either account, which option yields the higher after-tax wealth at retirement?
A taxpayer is deciding between contributing to a Traditional IRA or a Roth IRA in Year 1. They are in the 24% marginal tax bracket in Year 1 and expect to be in the 35% bracket in retirement. The contribution amount is $7,000. Assuming the investment grows at the same rate in either account, which option yields the higher after-tax wealth at retirement?
Answer options:
A.
Traditional IRA
B.
Roth IRA
C.
Both produce the same result.
D.
Cannot be determined without the investment horizon.
How to approach this question
Compare current tax rate vs. future tax rate. If Future Rate > Current Rate -> Roth (Lock in low rate now). If Current Rate > Future Rate -> Traditional (Take deduction now).
Full Answer
B.Roth IRA✓ Correct
B
Planning Principle: If tax rates are expected to rise (24% -> 35%), it is better to pay tax now (Roth) than later (Traditional). <br/>Roth: $7k (after tax) grows to $X tax-free.<br/>Traditional: $7k (pre-tax) grows to $X, then taxed at 35%. <br/>Since the deduction in Year 1 is only worth 24%, giving up 35% later is a loss.
Common mistakes
Ignoring the rate differential.
Practice the full CPA TCP Practice Exam 4
68 questions · hints · full answers · grading
More questions from this exam
Q01In Year 1, an executive exercises Incentive Stock Options (ISOs) to purchase 1,000 shares of comp...MediumQ02A taxpayer provides an interest-free loan of $200,000 to their adult child on January 1, Year 1, ...HardQ03A taxpayer, age 15, has $4,500 of interest income and no earned income in Year 1. The taxpayer is...MediumQ04A taxpayer anticipates their marginal tax rate will increase from 24% in Year 1 to 35% in Year 2....MediumQ05A taxpayer is subject to the safe harbor rules for estimated tax payments. Their Year 1 Adjusted ...Medium