31. Suppose that you are 25, single, and in a 25% bracket for federal income tax

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31. Suppose that you are 25, single, and in a 25% bracket for federal income tax and a 7% bracket for state and local income taxes (in 2007 this corresponded to an income, beyond exemptions and deductions, of $32,000-$77,000 for a single person). This means that you pay a total of 32% in income tax on part of your income but a lower rate on the rest (you also pay 7.65% Social Security and Medicare payroll tax). Assume that instead of paying 32% on some income, you put it into a tax-deferred retirement account (TDA) as follows:

(a) Suppose that you are willing to commit to $100 a month less take-home pay. You realize that you don't pay income tax on the money that you put into the retirement plan, so you can actually put in more than $100 per month while reducing your take-home pay by only $100. How much can you put into the retirement fund each month?
(b) How much will be in your fund at age 65 if you can get a steady return of 7.5% compounded monthly?
(c) Suppose that when you turn 65 you withdraw the entire amount in your account and pay the deferred taxes that are owed on it, say a total of 32@ (federal, state, and local combined). How much do you net?



32. We continue the tax-deferral considerations of the previous exercise.
(a) Suppose that instead of contributing to a tax-deferred plan, you take the money as income, pay 32% income tax on it, and deposit what remains into a savings account or safe investment that pays a steady 7.5% compounded monthly. (Note that compared with not putting away any money, your paycheck is reduced by just what you contribute, since you still must pay income tax on the $147.06.) How much will be in your account at age 65?
(b) Under another alternative, you take $100 per month, pay 32% income tax on it, and deposit what remains into a Roth IRA ( individual retirement account). For this kind of retirement account, the interest earned is not taxed. Assuming the same savings account or safe investment that pays a steady return of 7.5% compounded monthly, how much will be in your account, tax-free, at age 65?

Explanation / Answer

No idea sorry i tried!

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