(a) What is the final payoff after tax if $100 pre-tax income is invested in a regular savings account? (b) What is the final payoff after tax if $100 pre-tax income is invested in a retirement account? (c) What is the final payoff after tax if $100 pre-tax income is invested in a Roth account?

(a) What is the final payoff after tax if $100 pre-tax income is invested in a regular savings account? (b) What is the final payoff after tax if $100 pre-tax income is invested in a retirement account? (c) What is the final payoff after tax if $100 pre-tax income is invested in a Roth account?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Concept explainers

Tax Deferred Retirement Benefits

It stands for Simplified Employee Pension Individual Retirement Account. This savings plan is for self-employed persons such as independent contractors, freelancers, entrepreneurs, etc. The tax rules of SEP IRA are the same as traditional IRA. Entrepreneurs can also open SEP IRA accounts for their employees and gain a tax advantage. The employees cannot make contributions to these accounts by themselves however they will be taxed upon withdrawal.

Question

Please answer using life-cycle problem.
Suppose the interest rate is 5%, the income
tax rate 35%, the tax rate on investment
income is 20%, and the investment horizon
40 years.
(a) What is the final payoff after tax if $100
pre-tax income is invested in a regular savings
account?
(b) What is the final payoff after tax if $100
pre-tax income is invested in a retirement
account?
(c) What is the final payoff after tax if $100
pre-tax income is invested in a Roth account?

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