Question 5 • Mathematics for Data and Financial Literacy
Greyson has saved $600,000 in a Roth IRA that earns an annual interest rate of 4.5% He plans to withdraw from the account each month for 20 years. If Greyson's employer had offered a 401(k) with the same interest rate, matching, and withdrawal schedule, how would the Roth IRA monthly payout compare to that of the 401(k)?
Answer
A
The Roth IRA payout would be the same as the 401(k), since both have the same balance and interest.
B
The Roth IRA payout would be lower, since the 401(k) includes employer matching.
C
The Roth IRA payout would be lower, since it is tax-free but had taxed contributions.
D
The Roth IRA payout would be higher, since withdrawals are tax-free.
Explanation
With the same account balance, interest rate, and withdrawal schedule, both accounts can pay the same amount before taxes. Qualified Roth IRA withdrawals are tax-free, while traditional 401(k) withdrawals are generally taxable, so Greyson keeps more of each Roth IRA withdrawal. Therefore, the Roth IRA payout would be higher after taxes.
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