You have a 12 year old child who will be going to

25. You have a 12 year-old child who will be going to college in six
years, at the age of 18. You are considering investing 6,000 a year
until then, so that when she does go to college you can help her out
with tuition. However, you think that you may need the 24,000 that
you will have invested by the time she is 16 in order to buy her a
car. You should:
a. Invest the 6,000 a year in a taxable account in your name.
b. Invest the 6,000 a year in a taxable account in her name.
c. Invest the 6,000 a year in a Roth IRA in your name.
d. Invest the 6,000 a year in a deductible IRA in your name.
e. Invest the 6,000 a year in lottery tickets.
C is the correct answer. Under the Roth IRA rules, you can always
withdraw the principal tax-free and penalty-free, no matter when you
withdraw the principal and no matter how you use the proceeds. So,
withdrawing the 24,000 when your child turns 16 would not result in
any taxation to you in the Roth IRA scenario, which is not true with
the deductible IRA scenario. Regardless of whether or not you
withdraw the principal when she is 16, any amount that you withdraw
to pay for her college when she is 18 is tax-free and penalty-free to the
extent it represents principal, and penalty-free (but not tax-free) to
the extent it represents earnings on the principal. This problem
illustrates the flexibility associated with Roth IRAs, relative to
deductible IRAs.
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26. You are 25 years old and your current ordinary income tax rate is
33%. You plan on retiring in 40 years, when you anticipate that
your ordinary income tax rate will be 28%. Your employer is
currently in the 25% tax bracket and will be in the 35% tax bracket
in 40 years.
What is the respective after-tax cost to your employer of $1 salary and $1
contribution to a pension plan?
After-tax cost of:
$1 salary $1 pension contribution
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