Question 2. 2. (TCOs 1, 3, and 10) Margaret is trying to decide whether or not t

Question

Question 2. 2. (TCOs 1, 3, and 10) Margaret is trying to decide whether or not to place funds in a qualified tuition program. Her son will be attending college in 4 years. She is in the 35% marginal tax bracket and believes she can earn 7% before tax return on alternative investments. Thus, $10,000 will accumulate to $11,948 (after-tax) in 4 years. Margaret expects tuition to increase at the rate of 5% each year to $12,155 in 4 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 contribute $ 11,948 by investing her funds for 4 years but she has to pay actual amount of tution.

Alternatively if she invests $ 10,000 in qualified tution program,the tutions will paid in 4 years.

The amount of tutions is less than $ 10,000.It is not subject to tax.

Thus, the qualified increasing tution amount is $ 12155. It is greater than alternative contribution amount.

So she should participate in qualified tution.

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