You are owed $5,000 in compensation by your employer. Your ordinary income tax rate is always 25% and your capital gains tax rate is always 10%. You can take the compensation currently or you can invest in either an ordinary 401k plan or a Roth 401k plan. If you take current compensation, you will earn an after tax rate of return of 7.2% annually. If you invest in either an ordinary or a Roth 401k plan you will earn apretax rate of return of 8% annually.
 
If you take current compensation, invest it for 40 years and then withdraw all of what has accumulated, how much will you have after paying all necessary taxes?
 

If you invest in an ordinary 401k plan, leave it untouched for 40 years and then withdraw all of what has accumulated how much will you have after paying all necessary taxes? Assume your ordinary income tax rate in 40 years is 25%.
 

Given b. what will be your annualized rate of return over the 40 years?
     

Given the data in b. except that your ordinary income tax rate in 40 years is 15% and capital gains tax rate is 5%, how much will you have in dollars after paying all necessary taxes?
 

$5,000 * (1+.08) ^40 * (1-.15)

 
Given d. what will be your annualized rate of return over the 40 years?

Answer rating: 100% (QA)

If you take the compensation currently and invest it for 40 years you will have 5000 1 007240 4526339 To calculate the aftertax amount we need to apply the ordinary income tax rate of 25 So the aftert... View the full answer