an employee is 10 years from retirement and has decided to begin making $2,000 annual contributions into an…

an employee is 10 years from retirement and has decided to begin making $2,000 annual contributions into an ira. the employee is currently in the 33% tax bracket but expects to be in the 15% tax bracket at retirement. which of the following contains the better choice with the correct reasoning? the traditional ira is the better choice because the employee will be taxed at a lower rate on lower earnings in retirement than during employment. the roth ira is the better choice because the employee will be taxed at a lower rate on lower earnings during employment than in retirement. the traditional ira is the better choice because the employee will be taxed at a higher rate on lower earnings in retirement than during employment. the roth ira is the better choice because the employee will be taxed at a higher rate on lower earnings during employment than in retirement.

an employee is 10 years from retirement and has decided to begin making $2,000 annual contributions into an ira. the employee is currently in the 33% tax bracket but expects to be in the 15% tax bracket at retirement. which of the following contains the better choice with the correct reasoning? the traditional ira is the better choice because the employee will be taxed at a lower rate on lower earnings in retirement than during employment. the roth ira is the better choice because the employee will be taxed at a lower rate on lower earnings during employment than in retirement. the traditional ira is the better choice because the employee will be taxed at a higher rate on lower earnings in retirement than during employment. the roth ira is the better choice because the employee will be taxed at a higher rate on lower earnings during employment than in retirement.

Answer

Brief Explanations:

  • Traditional IRA: Contributions are tax - deductible. So, if the employee is in a higher tax bracket (33%) now, they get a larger tax deduction. When they withdraw in retirement (15% tax bracket), they pay less tax on the withdrawals.
  • Roth IRA: Contributions are made with after - tax dollars. If the employee is in a higher tax bracket now (33%), they pay more tax on the income before contributing. In retirement, withdrawals are tax - free. But since the tax rate in retirement (15%) is lower than the current tax rate (33%), it is better to take the tax deduction now (Traditional IRA) and pay less tax later.

Answer:

The Traditional IRA is the better choice because the employee will be taxed at a lower rate on lower earnings in retirement than during employment.