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

Question

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

(a) a tax-deferred annuity that pays 5%/year (compounded annually), tax deferred for 7 years $ Incorrect: Your answer is incorrect. (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

Option A Investment amount 15000 Intt Rate 5% Tax deffered 7 yrs Year Principal Interest @ 5% Closing Balance Tax on Interest 1 15000 750 15750 188 2 15750 788 16538 197 3 16538 827 17364 207 4 17364 868 18233 217 5 18233 912 19144 228 6 19144 957 20101 239 7 20101 1005 21107 251 Closing Value of Investment at the end of Yr 7 21107 Less: Tax payable at the end of yr 7 1527 Value of Investment 19580 Option b Investment amount 15000 Intt Rate 5% Tax deffered 0 Year Principal Interest @ 5% Tax on Interest Net Interest Income Closing Balance 1 15000 750 188 563 15563 2 15563 778 195 584 16146 3 16146 807 202 605 16752 4 16752 838 209 628 17380 5 17380 869 217 652 18031 6 18031 902 225 676 18708 7 18708 935 234 702 19409 Value of Investment at the end 19409

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