Understanding 401k And IRAs For This Assignment

Understanding 401k And Irasfor This Assignment You Will Prepare A P

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 the following hypothetical questions/situations to explain the retirement plans in further detail.

1. 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. 2. 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. 3. 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. 4. 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. 5. As an employee of an organization, you may have access to invest in a 401(k) plan. 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 instruction

The financial landscape of retirement planning is intricate yet crucial for long-term financial security. Among the most prominent investment vehicles are the 401(k) plans and Individual Retirement Accounts (IRAs). Both serve as powerful tools for wealth accumulation, offering tax advantages tailored to different investor needs and preferences. To understand the efficacy of these accounts, it's essential to compare their earning potentials, tax implications, and strategic uses. This paper evaluates which account, between a traditional IRA and a Roth IRA, would generally earn more for the investor, alongside detailed explanations supported by current research, and explores various hypothetical scenarios to illustrate practical applications of retirement planning strategies.

Comparing Traditional IRA and Roth IRA in Terms of Earnings

The primary differentiation between a traditional IRA and a Roth IRA lies in their tax treatment. Contributions to a traditional IRA are often tax-deductible, potentially lowering taxable income in the contribution year, but withdrawals during retirement are taxed as ordinary income (IRS, 2022). Conversely, Roth IRA contributions are made with after-tax dollars, but qualified withdrawals are tax-free, enhancing potential earnings in the long run. The decision on which accounts might yield more depends significantly on the investor’s current versus future tax rate. Generally, if an individual expects to be in a higher tax bracket during retirement, a Roth IRA allows their investments to grow tax-free, potentially resulting in higher net gains (Poterba et al., 2019). For example, a 35-year-old investor using a Roth IRA with consistent contributions may benefit from accumulated tax-free growth compared to a traditional IRA, considering favorable tax conditions and income growth over time.

Identifying Federal Tax Brackets

Understanding one's federal tax bracket is vital for effective retirement planning. Tax brackets are based on taxable income and are published annually by the IRS. Individuals can determine their bracket by calculating their taxable income—gross income minus deductions—and comparing it with IRS tax tables (IRS, 2022). For example, in 2023, the IRS delineates tax brackets at different income ranges for single filers, married filing jointly, and other statuses. Knowing one's tax bracket influences decisions such as choosing between traditional and Roth IRA contributions, optimizing tax efficiency, and planning withdrawals (Gale & Samwick, 2019).

Hypothetical Investments and Contributions

Suppose an individual plans to invest $3,500 in both a traditional IRA and a Roth IRA. The net contribution after considering possible tax deductions varies. For a traditional IRA, if the individual qualifies for a full deduction based on income, the gross $3,500 contribution would be tax-deductible, effectively reducing taxable income by that amount. However, for a Roth IRA, contributions are made with after-tax dollars, so the gross amount remains $3,500, with no immediate tax benefit. Post-tax contributions imply that the net contribution is equivalent to the gross amount, but the tax implications upon withdrawal differ (IRS, 2022). The primary difference is that traditional IRA contributions may be deductible, reducing current taxable income, while Roth IRA contributions do not impact current taxes but provide tax-free withdrawals at retirement.

Selecting Mutual Funds Based on Risk Tolerance

After establishing an IRA, an investor might choose to invest in mutual funds aligned with their risk tolerance. For conservative investors, bond funds are appropriate; for aggressive investors, stock funds are suitable. A balanced mutual fund combines stocks and bonds to diversify risk. For illustration, Franklin Templeton offers a variety of funds, such as the Franklin Income Fund, which aims for income with moderate risk, suitable for middle-risk investors (Franklin Templeton, 2023). The selection justified here is based on the fund's historical performance, management quality, and alignment with moderate risk tolerance, considering an average annual return of approximately 7% over the past decade.

Long-Term Investment Growth Calculation

Using an assumed average annual return of 7%, investing $3,500 over thirty years with compounded interest, the future value (FV) can be calculated using the formula: FV = PV × (1 + r)^n, where PV is the present value, r is the annual return rate, and n is the number of years. Substituting, FV = $3,500 × (1 + 0.07)^{30} ≈ $3,500 × 7.612. Therefore, FV ≈ $26,642. The investment would grow to approximately $26,642, illustrating the power of compounding over long periods (Bodie et al., 2014).

Account Setup for Beneficiary Transfer and Avoiding Probate

To ensure a smooth transfer of assets upon death and avoid probate, the retirement account should be designated with a beneficiary. This is accomplished by completing beneficiary designation forms provided by the financial institution, which become legally binding upon account holder’s death (Nolo, 2021). A correctly designated beneficiary allows for a direct transfer of funds, bypassing the probate process and ensuring timely inheritance for the recipient. This setup simplifies estate management and provides peace of mind that the assets will be transferred efficiently.

Understanding 401(k) Plans and Contribution Limits

A 401(k) plan is an employer-sponsored retirement account that allows employees to contribute a portion of their pre-tax earnings, fostering tax-deferred growth (United States Department of Labor, 2022). The benefits include immediate tax savings, employer matching contributions, and high contribution limits—up to $20,500 for 2023, with an additional catch-up contribution of $6,500 for those aged 50 and above (IRS, 2023). Contribution restrictions are governed by IRS limits and plan rules, such as nondiscrimination tests designed to prevent highly compensated employees from disproportionately benefiting. These restrictions encourage broad participation and help ensure the plan's tax advantages are equitably distributed among employees (Munnell & Sunden, 2019).

Conclusion

In conclusion, effective retirement planning requires a thorough understanding of different investment accounts, their tax implications, and strategic usage based on individual circumstances. While Roth IRAs often provide tax-free growth for higher earners in retirement, traditional IRAs may be advantageous for those seeking immediate tax deductions. The choice of mutual funds aligned with risk tolerance and the importance of beneficiary designation are crucial in maximizing retirement benefits. Enhanced knowledge of the limits and rules governing 401(k) plans further empowers investors to optimize their retirement savings, ensuring financial security in their later years.

References

• Bodie, Z., Kane, A., & Marcus, A. J. (2014). Investments (10th ed.). McGraw-Hill Education.
• Franklin Templeton. (2023). Franklin Income Fund. https://www.franklintempleton.com
• Gale, W. G., & Samwick, A. A. (2019). effects of tax policies on saving and investment. Journal of Economic Perspectives, 33(2), 115-138.
• Internal Revenue Service (IRS). (2022). Publication 590-A: Contributions to Individual Retirement Arrangements (IRAs). https://www.irs.gov/pub/irs-pdf/p590a.pdf
• Internal Revenue Service (IRS). (2023). Retirement Plan Contribution Limits. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-plan-contribution-limits
• Munnell, A. H., & Sunden, A. E. (2019). Coming Up Short: The Challenge of 401(k) Plans. The Urban Institute.
• Nolo. (2021). Beneficiary Designations: How to Protect Your Assets. https://www.nolo.com/legal-encyclopedia/beneficiary-designations-how-protect-your-assets.html
• Poterba, J. M., Venti, S. D., & Wise, D. A. (2019). The Impact of Tax Policy on Retirement Savings. In Handbook of the Economics of Taxation (pp. 567-602). Elsevier.
• United States Department of Labor. (2022). What Is a 401(k) Plan? https://www.dol.gov/general/topic/retirement/401k