Charlene 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 7% before-tax rate of return (BTROR).Charlene's marginal tax rate is 20%,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 outside the IRA"?

Question

Quizplus · Accepted Answer

The annualized ATROR for the "bond outside the IRA" is 5.6%. This is because Charlene will pay taxes on the interest income from the bond, which will reduce her overall return. The annualized ATROR is calculated as follows:ATROR = BTROR * (1 - Tax Rate)ATROR = 7% * (1 - 20%)ATROR = 7% * 0.8ATROR = 5.6%

Charlene Can Invest $4,000 of After-Tax Dollars (AT$)directly in a Taxable