If Sarah invests in the IRA, her net value (after withdrawing the funds and paying her taxes) five years from now will be

Individual Retirement Account (IRA) was established by the U.S. government to encourage savings for retirement. The features of the IRA are:

Income taxes are not on the earnings deposited or on the interest earned by the IRA funds.
When the IRA funds are withdrawn, the full amount withdrawn is taxed at the individual’s current income tax rate.

We can use an online finance calculator to calculate the future value of the IRA fund, and thereafter determine the net value.

Data and Calculations:

N (# of periods) = 5 years

I/Y (Interest per year) = 5%

PV (Present Value) = $10,000

PMT (Periodic Payment) = $0

Tax rate = 30%

Results

FV = $12,762.82

Total Interest $2,762.82

Tax (30%) = $3,828.85 ($12,762.82 x 30%)

Net value = $8,933.97 ($12,762.82 - $3,828.85)

Question Completion:

Sarah, who is five years from retirement, receives a $10,000 bonus at work. She is trying to decide whether to save this extra income in an IRA account.

Thus, if Sarah invests in the IRA, her net value (after withdrawing the funds and paying her taxes) five years from now will be $8,933.97.

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