Henry Copperfield is a manager in a medium size firm. He earns a good income and has
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Henry Copperfield is a manager in a medium size firm. He earns a good income and has marginal tax rate of 40%. He plans to save $2,000 per year for the next 17 years. He wants to maximize the after tax value of his savings to the family. He is considering four options:
- Invests in a term deposit account that will pay 5% per year interest, then withdraw the money in one lump sum after 17 years. What is the after-tax value of the investment? (4 marks)
- Open a tax-free savings account (TFSA). Invest the money to earn 4.5% per year. (3 marks)
- Open a spousal RRSP for his wife. Since she earns low income, it is expected that when she withdraws the money after 17 years, her average tax rate will be 20%. The bank pays 5.3% interest on the spousal RRSP. (4 marks)
- Open a RESP (Registered Education Savings Plan) for his baby boy, Shawn. His financial advisor told him that there would be a government grant (CESG) for his annual contribution, up to a limit. The money will be invested to earn 5.5% per year. When his son withdraws the money after 17 years, he pays an average tax rate of 15%. (4 marks)
Required: For each of the four alternatives, what is the after-tax amount of the investments? Assume that the contributions are at the end of each year.
Related Book For
Fundamentals of Cost Accounting
ISBN: 978-0077398194
3rd Edition
Authors: William Lanen, Shannon Anderson, Michael Maher
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