An individual in the 36 percent tax bracket invests $5,000 in a tax-exempt IRA. If the investment earns 10% annually, what will be the value of the IRA after five years?
A) $6,600
B) $6,818
C) $7,500
D) $8,053
E) $10,879

Question

Quizplus · Accepted Answer

First, find out how much is being saved on taxes by investing in a tax-exempt IRA: 
$5,000 x 0.36 = $1,800

So the effective cost of the investment is $5,000 - $1,800 = $3,200.

Now use compound interest formula to calculate the future value:

FV = PV x (1 + r)^n 
FV = $3,200 x (1 + 0.10)^5 
FV = $3,200 x 1.61051 
FV = $5,153.63

Since this is a tax-exempt IRA, this is the final value of the investment.

Therefore, the answer is D, $8,053 (the final value plus the tax savings of $1,800).

An Individual in the 36 Percent Tax Bracket Invests $5,000