Exam 18: Taxes and Investment Planning

Which of the following is a classic example of the Deferred Model?

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?

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

Examples of the Exempt Model include deductible IRAs,H.R.10 (Keogh) plans,Sec.401(k) plans,and tax deferred annuities.

The Roth IRA is an example of the Pension Model.

Sylvia makes a one-time $2,000 deductible contribution into a deductible traditional IRA account,which will earn 8% annually before taxes.Twenty-five years later,at age 65,she withdraws all of the accumulation from the IRA when she is in the 15% marginal tax bracket.What is the total of her after-tax accumulated proceeds from the IRA?

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)?

An individual in the top tax bracket is planning to establish a new corporation and is weighing the choice between the C corporation form and the S corporation form.She expects the corporation to be profitable each year,with all profits reinvested except to the extent needed to pay corporate taxes or shareholder taxes on profits.The shareholder's plan is to sell the business after six years for a substantial gain.The C corporation will qualify as a small business corporation under Sec.1202.Applying the C Corporation Model and the Flow-Through Model

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

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.

Flow-through entities include partnerships,limited liability companies,limited liability partnerships,and C corporations.

One of the characteristics of the Exempt Model is that earnings on the investment are exempt from explicit taxation.

The Deferred Model investment outperforms the Current Model investment if interest rates and tax rates are constant over time because the interest on the Deferred Model investment grows tax free until withdrawal.

Rich,an individual investor,lives in a land of no taxation and receive a $10,000 bonus.He invests this amount in a bond that pays interest of 4% per year and holds the bond for 5 years,reinvesting the interest annually at the same 4% return.At the end of 5 years the $10,000 original investment accumulates to

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

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

Given a choice between a fully-taxable investment and a tax-favored investment,investors will prefer the tax-favored investment,assuming the two investments are equally risky.

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

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

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?