A. Sarah, who is five years from retirement, receives a $10,000 bonus at work. She is trying to decide whether to save this extra income in an IRA account or in a regular savings account. Both accounts earn 5 percent nominal interest, and Sarah is in the 30 percent tax bracket in every year (including her retirement year)

Question

07-03-2022
Mathematics

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A. Sarah, who is five years from retirement, receives a $10,000 bonus at work. She is trying to decide whether to save this extra income in an IRA account or in a regular savings account. Both accounts earn 5 percent nominal interest, and Sarah is in the 30 percent tax bracket in every year (including her retirement year)

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topeadeniran2 topeadeniran2 · Answer 1 · 2022-03-16T14:39:31-04:00

The interest rate given illustrates that the amount after tax will be $8933.96.

How to calculate the amount after tax?

From the complete information, Sarah receives a $10,000 bonus at work and the accounts earn 5 percent nominal interest, and Sarah is in the 30 percent tax.

Therefore, the amount after tax will be:

= 10000(1 + 5%)⁵ - 30% × 10000(1 + 5%)⁵

= 10000(1 + 0.05)⁵ - 30% × 10000(1 + 0.05)⁵

= 10000(1.2763) - 0.3 × 10000(1.2763)

= 12762.81 - 3828.84

= $8933.96

Therefore, the amount after tax will be $8933.96.

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How to calculate the amount after tax?

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