| Tax non-deferred problem....help |
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leolaw
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| Tax non-deferred problem....help |
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You deposit 25000 in an account to accrue interest for 40 years. The account pays 8% compounded annually. Assume that the income tax on the earned interest is 30%. What is the final balance after 40 years, if the income tax on the interest that is earned each year is paid at the end of each year?
Can someone tell me the equation that is used to find the answer?
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Mon Dec 13, 2004 11:30 pm |
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marotta
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| Re: Tax non-deferred problem....help |
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quote:
Originally posted by leolaw
You deposit 25000 in an account to accrue interest for 40 years. The account pays 8% compounded annually. Assume that the income tax on the earned interest is 30%. What is the final balance after 40 years, if the income tax on the interest that is earned each year is paid at the end of each year?
Can someone tell me the equation that is used to find the answer?
As a fee-only financial planner, I live for math problems like these:
Final Balance = 25000 * (1 + (0.08 * 0.7)) ^ 40
or
Final Balance = 25000 * (1.056 ^ 40)
or
Final Balance = 25000 * 8.842126583
or
Final Balance = $221,053.16
Thanks!
David John Marotta
Marotta Asset Management, Inc.
Fee-only Financial Planning
http://www.emarotta.com
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Tue Dec 14, 2004 5:09 pm |
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BlankenshipFP
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I couldn't agree more with you, David. Unfortunately, as I am required to deal with these questions throughout the day-to-day, I don't often get the chance to stop and work out the math behind the question. As a former math major, I always enjoy a good equation... 
Jim Blankenship, CFP®, EA
Blankenship Financial Planning, Ltd.
www.BlankenshipFinancial.com
Standard IRS Circular 230 Notice Applies
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Tue Dec 14, 2004 9:08 pm |
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Andrew
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I was about to ask where the .7 came from, but realized that it's derived from the income tax rate of 30%...
0.7 = (1.0 - 0.3)
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Tue Dec 14, 2004 9:13 pm |
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leolaw
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Thank you very much people, although I have already spent 4 hours to figure out this problem, but your reply once confirm that my answer is right.
THank you thank you
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Tue Dec 14, 2004 10:10 pm |
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BlankenshipFP
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One additional tip, for those that don't already know it:
For the above equation, you can find the same answer by going to MS-Excel and typing the following into a cell:
=fv((.08*.7),40,0,-25000)
This is not intended to take anything away from the elegance of the actual mathematics behind the equation, just a tip for folks who might want to use the equation in Excel.
Take care,
Jim Blankenship, CFP®, EA
Blankenship Financial Planning, Ltd.
www.BlankenshipFinancial.com
Standard IRS Circular 230 Notice Applies
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Thu Dec 16, 2004 3:42 pm |
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xboxundone
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Also you could do this,
Put 3000 in each year into and IRA for 8 years (24K) let it grow for 40 years from initial deposit and withdrawl tax free AS Earnings are tax-free if you pass the five-year test and are 59 1/2 or older at the time of withdrawal.
Then you have no tax take out 
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Thu Dec 16, 2004 8:32 pm |
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