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4. Calculating the effects of investing pretax or after-tax dollarsin accounts that are or are not tax sheltered Amy just started leaming about options for
4. Calculating the effects of investing pretax or after-tax dollarsin accounts that are or are not tax sheltered Amy just started leaming about options for saving for her retirement. Her friend is a big fan of tax-sheltered accounts. pre-tax dollars? non-tax- sheltered accounts? after tax dollars? tax-sheltered accounts? under the mattress? Why do you suppose that is? Check all that apply. Some withdrawals may be tax-free. Investments are always safer in a tax-sheltered account. Earnings are tax-deferred as long as they are reinvested within the account. Contributions may be tax deductible in the year the contributions are made. Before she commits any money to an account, Amy wants to see how much her savings would earn using different investment tactics. (For now assume there are no limitations or restrictions on her retirement contributions.) She asked you to help and provided the following information: She plans to invest 5,000 every year for 30 years. She has found an investment account that earns 5% per year. She is in a 20% income tax bracket. Interest Factors - Future Value of an Annuity Years 2% 3% 4% 5% 10 10.9497 11.4639 12.0061 12.5779 11 12.1687 12.8078 13.4864 14.2068 12 13.4121 14.1920 15.0258 15.9171 13 14.6803 15.6178 16.6268 17.7130 14 15.9739 17.0863 18.2919 19.5986 15 17.2934 18.5989 20.0236 21.5786 16 18.6393 20.1569 21.8245 23.6575 17 20.0121 21.7616 23.6975 25.8404 18 21.4123 23.4144 25.6454 28.1324 19 22.8406 25.1169 27.6712 30.5390 20 24.2974 26.8704 29.7781 33.0660 21 25.7833 28.6765 31.9692 35.7193 22 27.2990 30.5368 34.2480 38.5052 23 28.8450 32.4529 36.6179 41.4305 24 30.4219 34.4265 39.0826 44.5020 25 32.0303 36.4593 41.6459 47.7271 26 33.6709 38.5530 44.3177 51.1135 27 35.3443 40.7096 47.0842 54.6691 28 37.0512 42.9309 49.9676 58.4026 29 38.7922 45.2188 52.9663 62.3227 30 40:5681 47.5754 56.0849 66.4389 40 60.4020 75.4013 95.0255 120.7998 an Using the previous table, complete the following table to show Amy the effect of different options that are available to her. Round your answers to the nearest dollar. Amy's Options After-Tax After-Tax Pretax Nonsheltered Sheltered Sheltered Annual investment $5,000 $5,000 $5,000 Number of years to invest 30 30 30 5 5 5 Interest offered by account (as a %). Effective interest for Amy (as a %) Interest factor from table Accumulated over 30 years 5 Invested over 30 years 5 20 Income tax bracket (as a %) 20 20 Income tax saved per year S $ $ $ Income tax saved over 30 years Your findings Amy's friend's fondness for tax-sheltered accounts, because, according to this analysis, they effectively earn nonsheltered accounts. account is the best, in part, because Using only the factors taken into account in this analysis, Amy concludes that the it's the only one that would save her $ in income taxes every year. Amy is tempted to use the money she would have sent to the IRS for fun but wants to know how much more she could earn if she put it toward her annual investment. First, she computes that her new annual investment would be $ Next, Amy applies the interest factor from the table of to reach an accumulated total of $
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