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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

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.

A. Some withdrawals may be tax-free.

B. Earnings are tax-deferred as long as they are reinvested within the account.

C. Investments are always safer in a tax-sheltered account.

D. Contributions may be tax deductible in the year the contributions are made.

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.

image text in transcribed

Your findings __Don't Support; Support__ Rebeccas friends fondness for tax-sheltered accounts, because, according to this analysis, they effectively earn __More than; less than; the same as__ nonsheltered accounts.

Using only the factors taken into account in this analysis, Rebecca concludes that the __Pretax Sheltered; after-tax nonsheltered; after-tax sheltered__ 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 __Type in answer__ to reach an accumulated total of $___.

Rebecca's 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 $ $ $ Rebecca's 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 $ $ $

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