Yon made contributions to a Traditional IRA over the course of 25 working years. Her contributions averaged $3,000 annually. Yon was in the 26% tax bracket during her working years. The average annual rate of return on the account was 4%. Upon retirement, Yon stopped working and making IRA contributions. Instead, she started living on withdrawals from the retirement account. At this point, Yon dropped into the 15% tax bracket. Factoring in taxes, what is the effective value of Yon’s Traditional IRA at retirement? Assume annual compounding.
$106,197.06
$92,453.91
$169,947.06
$111,194.57
To calculate the effective value of Yon's Traditional IRA at retirement, we need to consider the contributions made, the average annual rate of return, and the tax brackets during working years and retirement.
First, let's calculate the total contributions made over 25 years. Yon's contributions averaged $3,000 annually, so the total contributions would be:
Total Contributions = Annual Contribution × Number of Years
Total Contributions = $3,000 × 25
Total Contributions = $75,000
Now, let's calculate the growth of the contributions based on the average annual rate of return of 4%. We will use the future value of an ordinary annuity formula:
Future Value of Annuity = Payment × [(1 + Interest Rate)^Number of Years - 1] / Interest Rate
Future Value of Annuity = $3,000 × [(1 + 0.04)^25 - 1] / 0.04
Future Value of Annuity = $3,000 × [(1.04)^25 - 1] / 0.04
Future Value of Annuity = $3,000 × [1.1255 - 1] / 0.04
Future Value of Annuity = $3,000 × 0.1255 / 0.04
Future Value of Annuity = $9,765
Next, let's calculate the taxes paid during retirement. Yon dropped into the 15% tax bracket after retirement. So, the tax on the withdrawals would be:
Tax on Withdrawals = Withdrawals × Tax Rate
Tax on Withdrawals = $9,765 × 0.15
Tax on Withdrawals = $1,464.75
Finally, let's calculate the effective value of Yon's Traditional IRA at retirement:
Effective Value = Total Contributions + Future Value of Annuity - Tax on Withdrawals
Effective Value = $75,000 + $9,765 - $1,464.75
Effective Value = $83,765 - $1,464.75
Effective Value = $82,300.25
Therefore, the effective value of Yon's Traditional IRA at retirement is approximately $82,300.25.
None of the provided options match this calculated value.