Cooper can invest $10,000 after-tax dollars in a taxable bond either outside or inside a traditional nondeductible IRA. He will hold the investment for ten years. The bond yields 6% before taxes and Cooper's marginal tax rate is 33%. If he invests directly in the bond, he will withdraw an amount of interest each year sufficient to pay taxes and leave the remaining interest in the investment. What
are the after-tax accumulations in the bond and in the IRA? Cooper will not be subject to the 10% penalty tax when the IRA withdrawal occurs.
What will be an ideal response?
The after-tax accumulation for the direct investment in the bond uses the Current Model.
$10,000 [1 + .06(1 - 0.33)]10 = $14,831
The after-tax accumulation for the nondeductible traditional IRA uses the Deferred Model.
$10,000 [(1 + .06)10 (1 - 0.33) + 0.33] = $15,299
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