Some people have the opportunity to invest in stocks in a tax-advantaged retirem

Question

Some people have the opportunity to invest in stocks in a tax-advantaged retirement plan, such as a 401(k) plan. Consider the difference between Andy, who is able to save in a tax-advantaged plan, and Ben, who must pay taxes on his return each year. Both invest 100,000 in the same mutual fund at the same time and always reinvest their earnings in the fund. Suppose that the return on the mutual fund is 7% each year and that the tax rate is 15%. (note that ben must pay taxes each year on his earnings, so he can only reinvest his after-tax earnings; Andy, however, pays 15% tax rate when he retires and withdraws his funds.)

A - How much do Andy and Ben each accumulate over 10 years?

B - How much do Andy and Ben each accumulate over 30 years?

Explanation / Answer

After 10 years : Andy accumulates 100,000 * 1,07 ^ 10 = 196,715 Taxes at end (100,000-196,715)*15% =14,507 After taxes 196,715-14,507=182,208 Ben accumulates : 194,084 Taxes : 12,272 After taxes 181,812 After 30 years : Andy accumulates 100,000 * 1,07 ^ 30 = 761,226 Taxes at end (100,000-761,226)*15% =99,184 After taxes 761,226-99,184=662,042 Ben accumulates : 665,764 Taxes : 73,795 After taxes 591,969

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.