Question

6. A 529-state-approved Individual Retirement Account (IRA) permits parents to invest tax-free dollars into their children's college education fund (this money may only be used for educational expenses). Another popular plan, the Roth IRA requires after-tax dollars to be invested in a savings fund that may or may not) be used for paying future college expenses. Both plans are tax free when the money is eventually withdrawn to assist with college expenses. Clearly, the 529 IRA plan is a better way to save for college expenses than the Roth IRA Quantify "better when the marginal income tax rate is 28% and 58,900 each year is invested in a mutual fund earning 8% per year for 12 years. Note: The estimated cost of a college education 12 years from now is $131,000 Click the icon to view the interest and annuity table for discrete compounding when the MARR is 8% per year. Calculate the future worth of savings under the 529 IRA plan. FW529 IRA(8%)= (Round to the nearest dollar) Calculate the future worth of savings under the Roth IRA plan. FW Roth IRA(8%) = (Round to the nearest dollar) Thus, the 529 IRA plan accumulates (Round to one decimal place.) % (1) in future worth compared to the Roth IRA 9: More Info Capital Recovery Factor To Find A Given P AIP Discrete Compounding; i=8% Single Payment Uniform Series Compound Compound Sinking Amount Present Amount Present Fund Factor Worth Factor Factor Worth Factor Factor To Find F To Find P To Find F To Find P To Find A Given P Given F Given A Given A Given F FIP PIF FIA PIA A/F 1.0800 0.9259 1.0000 0.9259 1.0000 1.1664 0.8573 20800 1.7833 0.4808 1.2597 0.7938 3 2464 2.5771 0.3080 1.3605 0.7350 45061 3.3121 0.2219 1.4693 0.6806 5 8666 3.9927 0.1705 1.5869 0.6302 73359 4.6229 0.1363 1.7138 0.5835 8.9228 5.2064 0.1121 1.8509 0.5403 10.6366 5.7466 0.0940 1.9990 0.5002 12.4876 6.2469 0.0801 2 1589 0.4632 14.4866 6.7101 0.0690 23316 0.4289 16 6455 7.1390 0.0601 2.5182 0.3971 18.9771 7.5361 0.0527 2.7196 0.3677 21 4953 7.9038 0.0465 29372 0.3405 24 2149 8.2442 0.0413 3.1722 0.3152 27 1521 8.5595 0.0368 1.0800 0.5608 0.3880 0.3019 0.2505 02163 0.1921 BROW 0.1740 0 1601 0.1490 0.1401 0.1327 0.1265 0.1213 0.1168 (1) O more O less

Answer 1

FW for 529 IRA = annuity amount*FW factor = 8,900*18.9771 = 168,896.19 or 168.896

FW for Roth IRA = after-tax annuity amount*FW factor = 8,900*(1-28%)*18.9771 = 121,605.26 or 121,605

(Note: FW factor taken from the table.)

%age difference between the 2 IRAs:

Taking Roth IRA as the base, (168,896-121,605)/121,605 = 38.9%

529 IRA accumulates 38.9% more than the Roth IRA. (Note: If 529 IRA is taken as base then the it is 28.0% higher.)