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Use the following data to respond to the questions that follow The taxpayer earns pre-tax compensation of $16,666.66 The taxpayer always has an ordinary tax
Use the following data to respond to the questions that follow
- The taxpayer earns pre-tax compensation of $16,666.66
- The taxpayer always has an ordinary tax rate of 40%
- The taxpayer always has a capital gains tax rate of 20%
- The taxpayer can earn an annual pretax rate of return on taxable bonds, stocks and tax exempt bonds of 4%
- The taxpayer reinvests all investment returns in the same investment earning the same pretax rate of return
- If the taxpayer invests this compensation in fully taxable bonds how much will she have at the end of 10 years after all taxes have been paid?
- From the preceding question, what is the annualized after-tax rate of return?
- If the taxpayer invested in fully taxable bonds in an ordinary 401k plan how much will she have at the end of 10 years after all taxes have been paid?
- From the preceding question, what is the annualized after-tax rate of return?
- How much more or less is your finding in a. versus c.? Express your answer as a percentage with two digits to the right of the decimal. Use your answer to a. as the denominator.
- What explains the difference, if any, you reported in e.?
- If the taxpayer invests in stocks how much will she have at the end of 10 years after all taxes have been paid?
- From the preceding question, what is the annualized after-tax rate of return?
- If the taxpayer invested in stocks in an ordinary 401k plan how much will she have at the end of 10 years after all taxes have been paid?
- If the taxpayer invests in tax exempt bonds how much will she have at the end of 10 years after all taxes have been paid?
- What annualized after-tax rate of return will she earn?
- If the taxpayer invested in tax exempt bonds in an ordinary 401k plan how much will she have at the end of 10 years after all taxes have been paid?
Is there a tax advantage to investing in tax exempt bonds inside an ordinary 401k? Answer yes or no and then briefly explain your answ
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