Question
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.
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 $ $ $Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started