(Retirement Savings Plans MC) An employee is 10 years from retirement and has decided to begin making \( \$ 2,000 \) annual contributions into an IRA. The employee is currently in the \( 33 \% \) tax bracket but expects to be in the \( 15 \% \) tax bracket at retirement. Which of the following contains the better choice with the correct reasohing?

Given the scenario, **a Traditional IRA** is the better choice. Here's the reasoning: 1. **Current Tax Bracket vs. Future Tax Bracket:** - **Current Tax Bracket:** 33% - **Expected Retirement Tax Bracket:** 15% 2. **Traditional IRA Advantages:** - **Tax Deduction Now:** Contributions to a Traditional IRA are typically tax-deductible in the year they are made. Since the employee is currently in a higher tax bracket (33%), this provides a significant immediate tax benefit. - **Taxation Upon Withdrawal:** Withdrawals during retirement are taxed at the future lower tax rate of 15%, resulting in overall tax savings. 3. **Roth IRA Considerations:** - Contributions to a Roth IRA are made with after-tax dollars. Given the current higher tax rate, paying taxes now would be less advantageous compared to the Traditional IRA. - While Roth IRAs offer tax-free withdrawals, the higher initial tax payment doesn't align with the employee's expectation of being in a lower tax bracket during retirement. **Conclusion:** Opting for a **Traditional IRA** maximizes tax benefits by reducing taxable income now when the tax rate is higher and taking advantage of lower tax rates during retirement. **Answer:** Choose a Traditional IRA because contributing now at a higher tax rate reduces current taxes, and withdrawals later are taxed at the lower retirement rate.