Ben is in the 25% bracket and has $15,000 available for investment during her cu

Question

Ben is in the 25% bracket and has $15,000 available for investment during her current tax year. Assume that he remains in the same tax bracket over the next 7 years and determine the accumulated amount of his investment if he puts the $15,000 into the following.

(a) a tax-deferred annuity that pays 5%/year (compounded annually), tax deferred for 7 years $

______________ (after taxes)

(b) a taxable instrument that pays 5%/year (compounded annually) for 7 years (Hint: In this case, the yield is 3.75%/year.)

___________

Explanation / Answer

Hence the ending balance for taxable will be equal to $127,232 and for tax deferred annunity is equal to $121,287

Year Savings @ 0% Beginning Balance Return @ 5% Taxes @ 25% Ending Balance Beginning Balance Return @ 5% Ending Balance 1 $15,000 $15,000 $1,500 $375 $31,125 $15,000 $1,500 $31,500 2 15,000 31,125 2,306 577 47,855 31,500 2,325 48,825 3 15,000 47,855 3,143 786 65,212 48,825 3,191 67,016 4 15,000 65,212 4,011 1,003 83,220 67,016 4,101 86,117 5 15,000 83,220 4,911 1,228 101,903 86,117 5,056 106,173 6 15,000 101,903 5,845 1,461 121,287 106,173 6,059 127,232

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