Question
Tommy (age 47) and his wife, Michelle (age 49), live in Columbus, Ohio, where Tommy works for Callahan Auto Parts (CAP) as the vice president
Tommy (age 47) and his wife, Michelle (age 49), live in Columbus, Ohio, where Tommy works for Callahan Auto Parts (CAP) as the vice president of the brakes division. Tommys 2018 salary is $360,000. CAP allows Tommy to participate in its nonqualified deferred compensation plan in which participants can defer 15 percent of their salary for five years. Tommy also participates in CAPs qualified 401(k) plan. Tommys current marginal tax rate is 24 percent and CAPs current marginal tax rate is 35 percent.Assuming Tommy earns a 6 percent after-tax rate of return and he expects his marginal tax rate to be 30 percent in five years, what before-tax deferred compensation payment in five years would make him indifferent between receiving the deferred compensation payment or 15 percent of his salary now (ignore payroll taxes)?
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