Calculating the effects of investing pretax or after-tax dollarsin accounts that are or are not tax sheltered

Rebecca just started learning about options for saving for her retirement. Her friend is a big fan of tax-sheltered accounts.

Why do you suppose that is? Check all that apply.

Some withdrawals may be tax-free.

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.

Investments are always safer in a tax-sheltered account.

Before she commits any money to an account, Rebecca 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 1,000 every year for 40 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

Using the previous table, complete the following table to show Rebecca the effect of different options that are available to her. Round your answers to the nearest dollar.

	Rebeccas Options
	After-Tax	After-Tax	Pretax
	Nonsheltered	Sheltered	Sheltered
Annual investment	$1,000	$1,000	$1,000
Number of years to invest	40	40	40
Interest offered by account (as a %)	5	5	5
Effective interest for Rebecca (as a %)
Interest factor from table
Accumulated over 40 years
Invested over 40 years
Income tax bracket (as a %)	20	20	20
Income tax saved per year
Income tax saved over 40 years

Your findings dont support Rebeccas friends fondness for tax-sheltered accounts, because, according to this analysis, they effectively earn nonsheltered accounts.

Using only the factors taken into account in this analysis, Rebecca concludes that the account is the best, in part, because its the only one that would save her $

in income taxes every year.

Rebecca 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, Rebecca applies the interest factor from the table of

to reach an accumulated total of $

.