Jan can invest $4,000 of after- tax dollars (AT$) directly in a taxable bond outside an IRA, or she can contribute the $4,000 to a nondeductible IRA and invest in the same bond through the IRA vehicle. In either case, the bond yields an annual 4% before- tax rate of return (BTROR). Jan's marginal tax rate is 15%, and she expects it to remain so for the entire investment horizon of 25 years. What is her annualized after- tax rate of return (annualized ATROR) for the "bond inside the IRA"?

Question

Quizplus · Accepted Answer

The bond inside the IRA grows tax-deferred, so the 4% return is not taxed annually. After 25 years, the accumulated amount is taxed at 15%. The annualized after-tax rate of return is calculated by adjusting the 4% return for the tax impact at the end of the investment period.

Jan Can Invest $4,000 of After- Tax Dollars (AT$) Directly