Question:
The Taxpayer Relief Act created Roth IRA which allows you to make after-tax retirement contributions of up to $2000 annually and contributions are not tax-deductible, but no taxes are paid on earnings. In contrast, contributions to IRAs are tax-deductible, but taxes will be paid on all future distributions. Consider an individual who is five years away from retirement and will need to withdraw all her retirement funds at that time. She has $2000 in pretax income to allocate each year to a retirement plan, faxes 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 traditional IRA for free. Which should she choose?