& 10) Margaret is trying to decide whether or not to place funds in a qualified
ID: 2361923 • Letter: #
Question
& 10) Margaret is trying to decide whether or not to place funds in a qualified tuition program. Her son will be attending college in four years. She is in the 35% marginal tax bracket and she believes she can earn 7% before tax return on alternative investments. Thus, $10,000 will accumulate to $11,948 (after-tax) in four years. Margaret expects tuition to increase at the rate of 5% each year to $12,155 in four years. Her son will be in the 15% marginal tax bracket in all relevant years. Given these assumptions, should Margaret participate in the qualified tuition program? (Points : 15)Explanation / Answer
Margaret can accumulate $11,948 by investing her funds for 4 years, but then she must pay the actual tuition.
Alternatively, if she invests the $10,000 in a qualified tuition program, the tuition will be paid in 4 years, regardless of the amount.
The amount of the tuition less the $10,000 will not be subject to tax.
Thus, the after-tax future value of the qualified tuition fund is $12,155 ($12,155 – $0),
which is greater than the alternative accumulated value.
Therefore, it appears that Margaret should participate.
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