Exam 34: Taxes and Investment Planning

Jorge contributes $5,000 to a traditional nondeductible IRA in the current year and makes no subsequent contributions.Assume that the investment in the IRA yields 6% per year and that Jorge allows his investment to accumulate for 20 years.At the end of twenty years,he withdraws all of the amounts from the IRA when his marginal tax rate is 30%.What is his after-tax accumulation?

A single taxpayer earns a salary of $6,000.If he is taxed with a 10% flat rate,he has $5,400 of after-tax dollars available to invest.

Judy is considering receiving either $20,000 of current salary or $40,000 of deferred compensation in 12 years.Her current tax rate is 33%,but she expects her tax rate to be 15% 12 years from now.Judy can invest any after-tax current salary at a 6% ATROR.If she receives the deferred compensation,her investment will accumulate to

The Roth IRA is an example of the Pension Model.

Sophia's employer is considering paying her either $20,000 of current salary or $40,000 of deferred compensation in 12 years.Her employer's current tax rate is 34%,but the employer expects its tax rate to be 25% 12 years from now.The employer's ATROR is 11%.If the employer waits and pays the deferred compensation,its after-tax deferred compensation expense projected to Year 12 is

When evaluating current salary versus deferred compensation,an employer considers the fact that a current salary is deducted in the current year and provides an immediate tax benefit.

State and local government obligations such as municipal bonds are classic examples of which model?

Investments conforming to the Current Model provide no deferral advantages because earnings are taxed currently.

An investment in a growth stock which does not pay dividends is an example of the Exempt Model.

The Pension Model has all of the following characteristics except for

The investment models discussed in the text include all of the following except for

Under the Pension Model,the entire accumulation,not just the earnings,is taxed at the end of the investment horizon.

While tax-exempt bonds are not subject to income tax under the Internal Revenue Code,they are subject to implicit taxes caused by increased demand driving up the price.

A taxpayer in the 25% marginal tax bracket invests $1,000 of after-tax dollars at 10% interest before taxes.At the end of year one,the taxpayer will have accumulated after-tax dollars of $1,075.

If a fully-taxable bond yields a BTROR of 8% (R_b = 8%)and a tax-exempt bond of similar risk earns a BTROR of 5% (R_f = 5%),then the implicit tax is

At the beginning of year 1,Sandeep invests $10,000 in a money market fund that pays a 3% annual return before taxes.Sandeep's marginal tax rate is 25%,and he allows the after-tax earnings to remain in the money market fund.That is,he withdraws only enough cash to pay the taxes on the earnings.What is his after-tax accumulation at the end of year 2?

Willa is considering receiving either $20,000 of current salary or $30,000 of deferred compensation in two years.Her current tax rate is 35%,but she expects her tax rate to be 25% two years from now.Willa can invest any after-tax current salary at a 6% ATROR.If she receives the current salary and invests the after-tax amount,her investment will accumulate to

Taxpayers often have to decide between contributing to a traditional deductible IRA or a Roth IRA.In making the comparison between the two IRAs,which models should the taxpayer use?

The difference between the BTRORs of fully-taxable and tax-favored investments is called

Cooper can invest $10,000 after-tax dollars in a taxable bond either outside or inside a traditional nondeductible IRA.He will hold the investment for ten years.The bond yields 6% before taxes and Cooper's marginal tax rate is 33%.If he invests directly in the bond,he will withdraw an amount of interest each year sufficient to pay taxes and leave the remaining interest in the investment.What are the after-tax accumulations in the bond and in the IRA? Cooper will not be subject to the 10% penalty tax when the IRA withdrawal occurs.