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Mary, who is in the 25% marginal tax bracket, is considering purchasing an annuity that will pay her S15,000 per year for the remainder of
Mary, who is in the 25% marginal tax bracket, is considering purchasing an annuity that will pay her S15,000 per year for the remainder of her life. Her life expectancy is 15 years. The cost of the annuity is $155,695, and the cost is calculated to yield her an expected 5% return on her investment. As an alternative, Mary could place the $155,695 in a savings account yielding 5% and she could withdraw $15,000 each year for 15 years (reducing the value of the account to zero at the end of 15 years). She plans to take action on this on January 1, 2017. How might the tax laws applicable to annuities affect Mary's decision? Show your calculations for the first year that support your conclusion (i.e. how much income will she have in 2017 if she chooses to buy the annuity vs. putting the money in a savings account?)
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