Jane wants to save $1000 of current income. With an IRA, no taxes are paid on income or interest until the money is withdrawn in five years. Without an IRA, taxes must be paid whenever income or interest is received. Jane's federal/state tax bracket is 35%, and the nominal interest rate is 8%.(a)How much money will Jane have if she puts her money in an IRA and withdraws the money in five years?(b)How much money will Jane have if she does not put her money in an IRA, but rather in a regular (taxable) savings account, for five years?(c)How much does Jane gain in five years by using an IRA rather than a regular savings account?
What will be an ideal response?
| (a) | $955.06 = [$1000 × (1.08)5] × 0.65 |
| (b) | $837.51 = $650 × [1 + (0.08 × 0.65)]5 |
| (c) | $117.55 = $955.06 - $837.51 |
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