Ms P age 51 plans to save 5 000 this year
Ms. P, age 51, plans to save $5,000 this year toward her retirement. She is considering three different investments. First, she could make a nondeductible contribution to a traditional IRA earning 5 percent a year. Second, she could purchase a certificate of de-posit paying 5 percent annual interest. Third, she could purchase corporate stock paying a 5 percent annual qualifying dividend. In each case, Ms. P will reinvest her after-tax earnings (each investment will grow at an after-tax rate of return). She anticipates liquidating her investment after 15 years and using the after-tax cash to make a down payment on a condominium. Determine which investment has the greatest after-tax future value. To compute the future value of a sum invested in year 0, use the discount factors in Appendix a. Simply multiply the sum by (1 4 discount factor). For example, the future value of $100 invested at 9 percent after five years is $154 [$100 3 1.538 (1 4 .650 discount factor)]. In making your computations, assume that Ms. P’s marginal tax rate on ordinary in-come is 20 percent and her preferential rate on qualifying dividends is 10 percent over the 15-year investment period.
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