A taxpayer who pays 22% in taxes each year has these two accounts. Account 1: $10,000 is placed in a tax-deferred account that pays 5% interest compounded annually for 25 years.
Account 2: $10,000 is placed in a taxable account that pays 5% interest compounded annually for 25 years.
a. How much is in Account 1 after the 25-year period?
b. Since the taxpayer pays 22% of all income in taxes, 22% of the interest he makes each year will go towards taxes. Therefore, his annual interest rate in actuality is 22% less than the 5% quoted rate. What is his real annual interest rate?
c. How much will he actually have made after the 25-year period in Account 2 if taxes are taken into consideration?