Given the following facts and assumptions, determine what investment strategy Karen should follow to maximize accumulations and

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Given the following facts and assumptions, determine what investment strategy Karen should follow to maximize accumulations and how much she will have accumulated at the beginning of Year 10 (including her last paycheck).

• Karen’s ordinary tax rate is 25%, and her long-term capital gains tax rate is 15%. These rates will remain constant over her investment horizon.

• Karen earns $50,000 per year, which she receives on the first day of each year.

• Karen saves all her income after paying income taxes on her earnings. Taxes are payable immediately upon receiving her paycheck.

• At the beginning of each year, Karen can invest her savings in any of three vehicles:

1. A money market fund yielding 6% per year before taxes,

2. A traditional deductible IRA that yields 6% per year before taxes, and/or

3. Capital assets that grow at 5.21% per year before taxes.

• IRA contributions are limited to $6,000 per year and are deductible up to that amount.
Assume this limit applies to all years under consideration.

• At the beginning of Year 10, Karen saves no more income. Instead, she withdraws any IRA and/or money market accumulations and sells her capital assets for their accumulated FMV before taxes. She also receives a $50,000 paycheck at the beginning of Year 10.

• IRA accumulations are taxable immediately upon withdrawal with no additional penalty.

• Ignore itemized deductions, standard deductions, exemptions, etc.

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Pearsons Federal Taxation 2023 Individuals

ISBN: 9780137700127

36th Edition

Authors: Timothy J. Rupert, Kenneth E. Anderson, David S Hulse

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