Alison just started learning about options for saving for her retirement. Her friend is a big fan of tax-sheltered accounts.

Before she commits any money to an account, Alison wants to see how much her savings would earn using different investment tactics. (For now assume there are no limitations or restrictions on her retirement contributions.) She asked you to help and provided the following information:

She plans to invest 4,000 every year for 40 years.She has found an investment account that earns 5% per year.She is in a 20% income tax bracket.

Interest Factors Future Value of an Annuity

Years2%3%4%5%1010.949711.463912.006112.57791112.168712.807813.486414.20681213.412114.192015.025815.91711314.680315.617816.626817.71301415.973917.086318.291919.59861517.293418.598920.023621.57861618.639320.156921.824523.65751720.012121.761623.697525.84041821.412323.414425.645428.13241922.840625.116927.671230.53902024.297426.870429.778133.06602125.783328.676531.969235.71932227.299030.536834.248038.50522328.845032.452936.617941.43052430.421934.426539.082644.50202532.030336.459341.645947.72712633.670938.553044.317751.11352735.344340.709647.084254.66912837.051242.930949.967658.40262938.792245.218852.966362.32273040.568147.575456.084966.43894060.402075.401395.0255120.7998

Using the previous table, complete the following table to show Alison the effect of different options that are available to her. Round your answers to the nearest dollar.

Alisons OptionsAfter-TaxAfter-TaxPretaxNonshelteredShelteredShelteredAnnual investment$4,000$4,000$4,000Number of years to invest404040Interest offered by account (as a %)555Effective interest for Alison (as a %) Interest factor from table Accumulated over 40 years Invested over 40 years Income tax bracket (as a %)202020Income tax saved per year Income tax saved over 40 years

Your findings Alisons friends fondness for tax-sheltered accounts, because, according to this analysis, they effectively earn nonsheltered accounts.

Using only the factors taken into account in this analysis, Alison concludes that the account is the best, in part, because its the only one that would save her $

in income taxes every year.

Alison is tempted to use the money she would have sent to the IRS for fun but wants to know how much more she could earn if she put it toward her annual investment.

First, she computes that her new annual investment would be $

.

Next, Alison applies the interest factor from the table of

to reach an accumulated total of $

.