A 25 year old taxpayer has $1,400 of after-tax income that she wishes to invest for 10 years. She is trying to decide between a deductible IRA invested in corporate bonds and an after-tax investment in the same corporate bonds. Her tax rate is 30% for the entire period and she will have to pay an additional 10% tax penalty (40% in total) if she takes an IRA distribution before age 59.5. The returns on the corporate bonds would be 10% with either investment. She would invest the tax savings from the IRA into the IRA investment (principal IRA > principal non-IRA ). What is the difference between the after-tax returns from the IRA versus the non-IRA (AT return IRA - AT return non-IRA)?
A 25 year old taxpayer has $1,400 of after-tax income that she wishes to invest for 10 years. She is trying to decide between a deductible IRA invested in corporate bonds and an after-tax investment in the same corporate bonds. Her tax rate is 30% for the entire period and she will have to pay an additional 10% tax penalty (40% in total) if she takes an IRA distribution before age 59.5. The returns on the corporate bonds would be 10% with either investment. She would invest the tax savings from the IRA into the IRA investment (principal IRA > principal non-IRA ). What is the difference between the after-tax returns from the IRA versus the non-IRA (AT return IRA - AT return non-IRA)?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Transcribed Image Text:A 25 year old taxpayer has $1,400 of after-tax income that she wishes to
invest for 10 years. She is trying to decide between a deductible IRA
invested in corporate bonds and an after-tax investment in the same
corporate bonds. Her tax rate is 30% for the entire period and she will
have to pay an additional 10% tax penalty (40% in total) if she takes an
IRA distribution before age 59.5. The returns on the corporate bonds
would be 10% with either investment. She would invest the tax savings
from the IRA into the IRA investment (principal IRA > principal non-IRA
).
What is the difference between the after-tax returns from the IRA versus
the non-IRA (AT return IRA - AT return non-IRA)?
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