Given the following data for a post -retirement contribution
Annual contribution : 7500
tax bracket: 15%,
Effective rate: 9% ,
Investment years: 25
Note specific instructions:
Calculate the available retirement income (after tax) by:
1)reducing the contribution amount by the tax you would have to pay on that amount BEFORE calculating the final annuity amount.
So:
After reducing the contribution amount by the tax you would have to pay on that amount then
Calculate the interest earned and
Calculate balance after taxes
I got $420,089.9741 as the available retirement income..
is this correct?
note: the answer is not $539,968.21.
To calculate the available retirement income after taxes, you need to follow the instructions provided:
1) Start by calculating the tax you would have to pay on the annual contribution amount.
Given that the tax bracket is 15%, multiply the annual contribution by 15%:
Tax = Annual Contribution * Tax Bracket
Tax = $7500 * 0.15
Tax = $1125
2) Subtract the tax amount from the annual contribution to get the contribution after taxes:
Contribution after taxes = Annual Contribution - Tax
Contribution after taxes = $7500 - $1125
Contribution after taxes = $6375
3) Next, calculate the interest earned on the contribution after taxes over the investment years.
To do this, use the effective rate, which is 9%. Convert it to decimal form by dividing by 100:
Effective Rate = 9 / 100
Effective Rate = 0.09
Use the future value of an ordinary annuity formula to calculate the balance after taxes:
Balance after taxes = Contribution after taxes * (1 + Effective Rate)^Investment years
Balance after taxes = $6375 * (1 + 0.09)^25
4) Calculate the available retirement income by subtracting the taxes you would need to pay on the balance after taxes.
To find the tax on the balance after taxes, multiply it by the tax bracket:
Tax on balance after taxes = Balance after taxes * Tax Bracket
Tax on balance after taxes = $420,089.9741 * 0.15
Tax on balance after taxes = $63,013.496115
Available retirement income = Balance after taxes - Tax on balance after taxes
Available retirement income = $420,089.9741 - $63,013.496115
Available retirement income = $357,076.477985
Based on the calculations, the available retirement income after taxes should be $357,076.477985, not $539,968.21. Therefore, your result of $420,089.9741 is not correct.