IV You want to save $ today for retirement in years. You have to choose between the
two plans listed in i and ii
i Pay no taxes today, put the money in an interestyielding account, and pay taxes equal to
of the total amount withdrawn at retirement. In the US such an account is known
as a regular individual retirement account, or IRA.
ii Pay taxes equivalent to of the investment amount today, put the remainder in an
interestyielding account, and pay no taxes when you withdraw your funds at retirement.
In the US this is known as a Roth IRA.
a What is the expected present discounted value of each of these plans if the interest rate is
b Which plan would you choose in each case? Explain your logic clearly.
