Exam 34: Taxes and Investment Planning

Melanie is in the 39.6% tax bracket and is ineligible to make deductible or Roth IRA contributions.Nevertheless,she wishes to contribute $5,500 to a traditional nondeductible IRA.How much taxable salary must she earn to have $5,500 left for the contribution?

The Current Model provides the future value of an investment having which of the following characteristics?

Nolan earns a salary of $80,000 and has a flat tax rate of 28%.The amount of after-tax dollars he has to invest is

One characteristic of the Exempt Model is the fact that,like the Current and Deferred Models,only after-tax dollars are invested.

Charlene can invest $4,000 of after-tax dollars (AT$)directly in a taxable bond outside an IRA,or she can contribute the $4,000 to a nondeductible IRA and invest in the same bond through the IRA vehicle.In either case the bond yields an annual 7% before-tax rate of return (BTROR).Charlene's marginal tax rate is 20%,and she expects it to remain so for the entire investment horizon of 25 years.What is her annualized after-tax rate of return (annualized ATROR)for the "bond outside the IRA"?

Ken invests $10,000 in a deductible IRA which he will hold for 10 years.His current tax rate is 30% and he estimates that his tax rate will remain the same upon withdrawal.He will not be subject to the 10% penalty tax.Assume that the IRA will yield a before-tax return of 10%.What is the after-tax accumulation?

The formula for the after-tax accumulation (ATA)for the Exempt Model is

In the Exempt Model,the earnings are excluded from explicit taxation.

Kate can invest $4,000 of after-tax dollars (AT$)directly in a taxable bond outside an IRA,or she can contribute the $4,000 to a nondeductible IRA and invest in the same bond through the IRA vehicle.In either case the bond yields an annual 3% before-tax rate of return (BTROR).Kate's marginal tax rate is 15%,and she expects it to remain so for the entire investment horizon of 25 years.What is the after-tax accumulation for the "bond outside the IRA" after 25 years (assume that bond interest is reinvested at the same rate)?

The Flow-Through Model applies to a sole proprietorship.

Vidya can invest $5,000 of after-tax dollars (AT$)directly in a taxable bond outside an IRA,or he can contribute the $5,000 to a nondeductible IRA and invest in the same bond through the IRA vehicle.In either case the bond yields an annual 5% before-tax rate of return (BTROR).Vidya's marginal tax rate is 15%,and he expects it to remain so for the entire investment horizon of 20 years.What is the after-tax accumulation for the "bond inside the IRA" after 20 years?

In the Current Model,investment earnings are taxed as they are earned.

If "R" equals the before-tax rate of return and "t" equals the investor's marginal tax rate,then the after-tax rate of return represented by "r" can be expressed as

Elise contributes $1,000 to a deductible IRA.Her investment will earn 10% annually before taxes,and she will withdraw the accumulated amounts from the IRA after 20 years.She expects her tax rate to be 25% at that time and will not be subject to the 10% on early distributions.What is Elise's after-tax accumulation in the IRA?

Miles invests $20,000 in a taxable bond for 5 years that earns 5% interest per year.His marginal tax rate is 15%.What is his after-tax accumulated investment at the end of year 1?

Heidi invests $1,000 in a taxable bond for 5 years that earns 4% interest per year.Her marginal tax rate is 15%.What is her after-tax accumulated investment at the end of year 5 (assume that bond interest is reinvested at the same rate)?

In the Deferred Model,only after-tax dollars are invested.

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

A flow-through entity's primary characteristic is that income escapes taxation at the entity level and flows-through to be taxed at the ownership level.

In the Pension Model