Question
Use this information to answer the following group of 6 questions. If needed, you can use your results from earlier questions in the group as
Use this information to answer the following group of 6 questions. If needed, you can use your results from earlier questions in the group as inputs to subsequent questions in the group.
Your client recently received a pre-tax year-end bonus of $1,000. Her portfolio could benefit from an increase in her holdings of U.S. healthcare companies. As a result, she has decided to invest the bonus in the stock of a healthcare firm. You need to choose the optimal investment vehicle (in terms of taxes only) for this investment.
Facts:
You expect this stock to earn a pre-tax annual rate of return of 9%.
. This stock does not pay dividends and you do not expect it to begin paying dividends in the next
10 years.
. Your client's tax rate on ordinary income is 27% and on long-term capital gains it is 16%
(including the Medicare Surcharge). You expect her to face these tax rates for the next 10 years.
Your client is currently 50 years old, so any withdrawals from IRA type accounts held for at least the next 10 years will not be subject to a penalty tax. However, if the funds are withdrawn before age 59.5, there will be a 10% penalty.
Your client can invest the bonus through several vehicles:
- a taxable brokerage account,
- a non-deductible IRA, or
- a traditional deductible IRA
1. Assuming that your client will hold the stock for 10 years (she will sell it at the end of year 10), what is the expected after-tax accumulation in the taxable brokerage account as of the end of year 10?
When performing the calculations, round all interim results and the final answer to the nearest cent.
2. Assuming that your client will hold the stock for 10 years (she will sell it at the end of year 10), what is the expected after-tax accumulation in the non-deductible IRA as of the end of year 10?
When performing the calculations, round all interim results and the final answer to the nearest cent.
3. Assuming that your client will hold the stock for 10 years (she will sell it at the end of year 10), what is the expected after-tax accumulation in the traditional deductible IRA as of the end of year 10?
4. Now, Instead assume that you nave a premonition about your client, that she wIll be forced to withdraw the money early, at the end of 7 years. So, assume that your client will hold the stock for 7 years, but then sell it early at the end of the 7th What is the expected after-tax accumulation in the taxable brokerage account as of the end of year 7?
When performing the calculations, round all interim results and the final answer to the nearest cent.
5. Assuming that your client will hold the stock for 7 years (she will sell it at it early at the end of the 7th year), what is the expected after-tax accumulation in the non-deductible IRA as of the end of year 7?
When performing the calculations, round all interim results and the final answer to the nearest cent.
6. Assuming that your client will hold the stock for 7 years (she will sell it early at the end of the 7th year), what is the expected after-tax accumulation in the traditional deductible IRA as of the end of year 7?
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