Brenda has \$6,000 of before-tax dollars available for a one-time...

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# Brenda has \$6,000 of before-tax dollars available for a one-time...

Brenda has \$6,000 of before-tax dollars available for a one-time investment. She is in the 25% bracket and expects to remain in this bracket indefinitely. She can invest directly in a taxable bond yielding 8% before taxes, or she can open an IRA and invest in the bond within the IRA. She knows that she will need the accumulated funds before she reaches age 59 1/2. Thus, if she invests in an IRA, she will incur a 10% penalty on taxable amounts withdrawn from the IRA. Note: The two parts to this problem are best solves using a spreadsheet. a.) Using after-tax accumulations and annualized ATRORs, show that the nondeductible IRA outperforms the municipal bonds assuming Mark's tax rate remains at 35%. Assume no additional penalty upon withdrawal from the IRA. b.) How high would Mark's tax rate have to rise in Year n to make the municipal bond more attractive than the nondeductible IRA? Assume the 7% and 10% BTRORs remain constant over time.

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