One retirement account option allows a worker to save money without pa

Question

One retirement account option allows a worker to save money without paying taxes, but requires the worker to pay taxes on funds withdrawn from the account upon retirement. A second option requires the worker to pay taxes upfront, but allows the worker to withdraw funds tax-free upon retirement. Assuming that the total amount available in the worker’s retirement account at retirement is higher than the total amount contributed prior to retirement, workers can expect to pay less in taxes overall if they choose the second option.

Which of the following pieces of information would be most useful in determining whether the conclusion is valid for an individual worker?

(A) The amount of money the worker will contribute to the retirement plan over his or her career
(B) The amount that tax rates will increase in the future
(C) Whether inflation will be lower than the retirement account’s annual earnings
(D) How the worker’s tax bracket in retirement compares to his or her tax bracket while still employed
(E) The dollar value of the worker’s account upon retirement

Abhishek009 · Answer

(A) Amount contributed will be same in both the scenarios.
(B) If Tax rate increases in future then the conclusion is invalidated , they will pay more taxes.
(C) Inflation and its effect Out of scope.
(E) Time value is again Out of scope.

(D) Tx bracket must be the criteria for payment of less taxes, answer must be (D)

Skywalker18 · Answer

One retirement account option allows a worker to save money without paying taxes, but requires the worker to pay taxes on funds withdrawn from the account upon retirement. A second option requires the worker to pay taxes upfront, but allows the worker to withdraw funds tax-free upon retirement. Assuming that the total amount available in the worker’s retirement account at retirement is higher than the total amount contributed prior to retirement, workers can expect to pay less in taxes overall if they choose the second option.

Which of the following pieces of information would be most useful in determining whether the conclusion is valid for an individual worker?

Boil it down - Assuming that the total amount available in the worker’s retirement account at retirement is higher than the total amount contributed prior to retirement, workers can expect to pay less in taxes overall if they choose the second option.

(A) The amount of money the worker will contribute to the retirement plan over his or her career - Irrelevant - the actual amount is not relevant
(B) The amount that tax rates will increase in the future - Strengthens - If the tax rates in future increases, the people who chose plan 1 will have pay to more taxes
(C) Whether inflation will be lower than the retirement account’s annual earnings - Irrelevant - Though the actual purchasing power of $ might reduce if inflation is high but it it irrelevant to taxes
(D) How the worker’s tax bracket in retirement compares to his or her tax bracket while still employed - Correct - We can also apply variance test here.
If pre-retirement worker's tax bracket is LOWER than post-retirement's , then he should chose plan 2 else plan 1 (deferred tax payment).

(E) The dollar value of the worker’s account upon retirement - Irrelevant

Answer D

Helium · Answer

carcass

Can you please share the OE?

Thanks.

CJWORK · Answer

(A) The amount of money the worker will contribute to the retirement plan over his or her career - irrelevant to the conclusion (tax)
(B) The amount that tax rates will increase in the future - Let's keep
(C) Whether inflation will be lower than the retirement account’s annual earnings - irrelevant to the conclusion (tax)
(D) How the worker’s tax bracket in retirement compares to his or her tax bracket while still employed - Let's keep
(E) The dollar value of the worker’s account upon retirement - irrelevant to the conclusion (tax)

The conclusion says that second option allows workers to pay less tax. Let's consider B. If tax increases in the future, we do not know it is significant or not. Moreover, we do not know when it will be increased after retirement or prior. I think this choice is more suitable to consider when worker chooses option 1.

Then D is correct. If a worker chooses option 2. If tax during his career is increased significantly, then option 2 might not be the cheaper option.

Carcass · Answer

The explanation above are even more better

Farina · Answer

I though the argument was about amount upon retirement and not before that. Why they are considering option D when argument is all about "after retirement" options?

Sparta_750 · Answer

Farina

In option 2, taxes paid today are on the basis of funds deposited (that's the assumption) today. I think this might be the crux of your confusion. But I agree this could have been more explicit.

However, if there is still any confusion a detailed explanation is below

The argument favours second option. It's validity can be tested only when both the options are considered in parallel.

D suggests that considering tax brackets 1) at present 2) after retirement have to be considered which is valid.

Example:

Tax system of a country might tax income in the level

1000-2000 @ 10%
2000-10000 @ 20%
10000 and above @30%

Option 2

So if today I deposit 1000, my deposit would be taxed at 10%, so it's 100. Let's imagine that I assume 1000 every year for next 8 years till retirement, my total deposit would be 8000 but I would pay 100 in taxes each year, so total tax in option 2 would 800

However if I exercise option 1

My total taxes would be 30% on 8,000 = 2400

So it's important to consider tax brackets as mentioned in option D

Posted from my mobile device

Elite097 · Answer

To evaluate whether the conclusion that workers will pay less in taxes overall if they choose the second retirement account option is valid, we need to focus on how the choice of retirement account option impacts tax liability based on the worker's individual situation.

Conclusion Analysis:

The conclusion states that workers can expect to pay less in taxes overall with the second option (paying taxes upfront and withdrawing funds tax-free upon retirement) if:

The total amount available in the retirement account at retirement is higher than the total amount contributed prior to retirement.  
 Relevant Information for Determining Validity:

To determine whether the conclusion is valid for an individual worker, the key factor is comparing the tax implications of both options based on the worker's specific tax circumstances.

(D) How the worker’s tax bracket in retirement compares to his or her tax bracket while still employed

Explanation : This piece of information is crucial because it directly affects the tax impact of each option. If the worker is in a higher tax bracket during retirement compared to their current bracket, paying taxes upfront (option two) would be advantageous as withdrawals would be tax-free. Conversely, if the worker expects to be in a lower tax bracket in retirement, paying taxes at withdrawal (option one) might be less expensive.  
 Why Other Options Are Less Relevant:

(A) The amount of money the worker will contribute to the retirement plan over his or her career :

While this is important for understanding overall savings, it does not directly address the comparative tax impact of the two options.   
  (B) The amount that tax rates will increase in the future :

High/ low tax amount. This could influence the overall tax burden but does not provide specific information about how it will affect the individual’s current versus future tax brackets.   
  (C) Whether inflation will be lower than the retirement account’s annual earnings :

This impacts the growth of the account but is not directly relevant to determining the comparative tax burden of the two options.   
  (E) The dollar value of the worker’s account upon retirement :

This provides information on the amount available for withdrawal but does not address how the tax impact of the two options compares based on the worker's tax brackets.    
 Conclusion:

(D) How the worker’s tax bracket in retirement compares to his or her tax bracket while still employed  is the most useful information. It directly impacts the decision between paying taxes now (option two) versus paying taxes on withdrawals (option one) by showing how the tax implications of each option will play out given the worker’s specific tax situation.

VerbalBot · Answer

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One retirement account option allows a worker to save money without pa

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