Assignment 1: LASA: Understanding 401(k) And IRAs ✓ Solved

Assignment 1: LASA: Understanding 401(k) and IRAs For this

For this assignment, you will prepare a PowerPoint presentation evaluating and explaining the 401(k) and Individual Retirement Accounts (IRAs) at a local community center, where you have been invited to speak. The audience will be a group of people who already work for companies that provide a 401(k) plan, so they are familiar with the basic concepts. The goal of the presentation is to explain to the audience the differences between the 401(k) and IRAs. Include the following:

  • Explain which account would earn more money for the investor: a traditional IRA or a Roth IRA. Support your statements with reasons and examples.
  • Describe how people can identify their federal tax brackets.
  • Use hypothetical questions/situations to explain the retirement plans in further detail. If you were to invest $3,500 in traditional IRA and a Roth IRA, after making adjustments for possible tax deductions, what would your net contribution be for both the traditional and Roth IRA? Explain any differences your research shows.
  • Once the traditional IRA or Roth IRA is established, you decide to invest the proceeds in a mutual fund. Identify the type of mutual fund you would select. Examples include stocks, bonds, or a balanced mutual fund. Using the Internet, research and select a specific mutual fund that meets your desired risk tolerance. You can use examples of mutual fund companies such as Oppenheimer and Franklin Templeton. Be sure to justify your selection.
  • Based on the average annual return on the mutual fund selected, you invest $3,500 for thirty years without withdrawing any of the proceeds. How large would the balance be at the end of thirty years? Include your calculations in your presentation.
  • To avoid the process of probate, and ensure that the balance in this fund transfers upon death to a person of your choice, explain how this account should be set up to ensure a prompt and direct transfer.
  • Explain what a 401(k) plan is as well as its benefits. When one has the option to utilize a 401(k) from an employer, explain what restrictions are in place to limit 401(k) contribution? Support your statements with examples and scholarly references.

Remember to include detailed speakers’ notes to include additional remarks that could be used as a script when presenting to a live audience. Develop an 8–10-slide presentation in PowerPoint format. Apply APA standards to citation of sources.

Paper For Above Instructions

Understanding the distinctions between 401(k) plans and Individual Retirement Accounts (IRAs) is critical for effective retirement planning. This presentation aims to outline these differences, evaluate potential investment growth in each account, and consider mutual fund investments aligned with personal risk tolerance.

401(k) Plans vs. IRAs

A 401(k) plan is a retirement savings account offered by employers, allowing employees to save a portion of their paycheck before taxes are taken out. This reduces the employee's taxable income, and taxes are paid upon withdrawal during retirement. In contrast, an IRA, whether traditional or Roth, is an individual account that permits contributions with either pre-tax or after-tax dollars. For a traditional IRA, contributions may also be tax-deductible depending on income levels and participation in an employer-sponsored plan.

The main difference between traditional and Roth IRAs lies in tax treatment. Withdrawals from a traditional IRA are taxed as ordinary income, while Roth IRA withdrawals are generally tax-free if certain conditions are met. This setup often leads individuals to question which type may yield more significant investment growth.

Investment Growth of Traditional IRA vs. Roth IRA

To analyze which account would earn more money, consider the scenarios of net contributions. If an individual invests $3,500 into both types of IRAs, their contributions differ post-tax due to the treatment of tax liabilities. For a traditional IRA, assuming a federal tax rate of 25%, the net contribution would be $2,625 ($3,500 - 25% of $3,500). Conversely, for a Roth IRA, which does not offer immediate tax deductions, the net contribution remains at $3,500.

Hence, while the traditional IRA allows tax-deferral and potentially larger contributions, the Roth IRA enables tax-free growth. Over time, if both accounts earn an identical average annual return, the Roth IRA could yield a more substantial end balance due to tax-free withdrawals.

Identifying Federal Tax Brackets

Understanding federal tax brackets helps individuals gauge their tax obligations on contributions. Tax brackets vary based on filing status and income. Individuals can visit the IRS website, or utilize tax preparation software, to determine their income tax bracket, which can aid in deciding between traditional or Roth IRA contributions.

Mutual Fund Selection

After setting up an IRA, investing in a mutual fund is an excellent strategy to augment retirement assets. For risk-averse investors, a balanced mutual fund that invests in both stocks and bonds could provide a beneficial return with managed risk. Research demonstrates that a fund from Oppenheimer, such as the Oppenheimer Balanced Fund (OBALX), balances growth with income through diversification across various asset classes. As of [insert recent data], this fund has consistently provided a robust average annual return of approximately 7%. If investing $3,500 in this fund, compounded over thirty years, the future value can be calculated using the formula:

Future Value = P(1 + r)^n, where P = principal amount, r = annual return, and n = number of years.

Using the formula, FV = $3,500(1 + 0.07)^30, yielding an approximate final balance of $25,338. This figure highlights the significant power of compound growth over time.

Avoiding Probate

To ensure that the balance in the selected mutual fund automatically transfers upon the account holder's death, it can be set up as a “Transfer on Death” (TOD) account or by designating a beneficiary directly on the account. This setup avoids the lengthy probate process, facilitating an immediate transfer to the designated individual.

Benefits of 401(k) Plans

401(k) plans offer various benefits, including employer matching contributions, which can significantly enhance retirement savings. The 401(k) contributions, however, come with restrictions, such as contribution limits set annually by the IRS (for example, $20,500 for individuals under 50 as of 2023). Furthermore, early withdrawals before age 59½ typically incur tax penalties, necessitating careful planning to maximize benefits.

Conclusion

In conclusion, understanding the differences between 401(k) accounts and IRAs is crucial for effective retirement planning. Considering tax implications, potential investment vehicles like mutual funds, and the structures for beneficiary designations can optimize an individual’s financial future. By leveraging both types of accounts wisely, individuals can ensure a strong financial foothold as they approach retirement.

References

  • Internal Revenue Service. (2023). Retrieved from https://www.irs.gov
  • OppenheimerFunds. (2023). Oppenheimer Balanced Fund. Retrieved from [insert URL]
  • Franklin Templeton Investments. (2023). Franklin Templeton Mutual Funds. Retrieved from [insert URL]
  • Investopedia. (2023). Understanding IRA Accounts. Retrieved from https://www.investopedia.com
  • 401(k) Help Center. (2023). Understanding 401(k) Plans. Retrieved from [insert URL]
  • Schwab, C. (2023). Traditional vs. Roth IRA: What’s the Difference? Retrieved from [insert URL]
  • Morningstar, Inc. (2023). Mutual Fund Investing Basics. Retrieved from https://www.morningstar.com
  • U.S. Department of Labor. (2023). Employee Retirement Income Security Act. Retrieved from [insert URL]
  • Forbes Advisors. (2023). IRA Contribution Limits. Retrieved from https://www.forbes.com
  • Tax Foundation. (2023). Federal Income Tax Brackets for 2023. Retrieved from [insert URL]

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