There is currently a proposal to limit tax free savings plans (such as a 401 (K)

Question

There is currently a proposal to limit tax free savings plans (such as a 401 (K)) to $3.0 million per taxpayer, in part because that should provide a "reasonable" income in retirement. You have been thrifty and your tax free savings has reached its maximum of $3.0 million Suppose you expect to live another 20 years and you buy an annuity with your tax sheltered savings balance, what will be the annual payment you will receive before taxes if interest rates are 4.00%. Suppose you decide to spend your tax free savings over 10 years and you buy an annuity with your tax sheltered savings balance, what wil be the annual payment you will receive before taxes if interest rates are 4.00%. What do you predict will be the consequences of such legislation if it is passed? a) b) c)

Explanation / Answer

a)
PV=3,000,000
r=0.04
n=20
=PMT(0.04,20,-3000000)

=$220,745.25

b)

PV=3,000,000
r=0.04
n=20
=PMT(0.04,10,-3000000)
=$369,872.83

c)
If such a legislation is passed then there would be less incentive for people to save. This will also reduce the ineterest savings for the people and people would save less and spend more. This amy turn out good or bad. Good in the sense that more money would circulate in the economy and bad that in case of unemplyment or retirement people would have less corpus to spend

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