Ch03: TaBS Flashcards
Savings Vehicle I
Ex. Money-market account
Investment not deductible
Earnings taxed annually
Taxed at ordinary tax-rate
$I = after-tax contribution
$I x [1 + R x (1 - t)]^N
Savings Vehicle II
Ex. Deferred annuity, single premium
Investment is not deductible
Earnings tax are deferred
Taxed at ordinary tax-rate
$I x [1 + R]^N x [1 - t] + (t x $I)
Savings Vehicle III
Similar to SAV I
Ex: Mutual Fund
Investment is not deductible
Earnings tax are taxed annually
Taxed at capital gains tax
$I x [1 + R x (1 - t.cg)]^N
Savings Vehicle IV
Similar to SAV II
Ex. foreign corporation
Investment is not deductible
Earnings tax are deferred
Taxed at capital gains tax-rate
$I x [1 + R]^N x [1 - t.cg] + (t.cg x $I)
Savings Vehicle V
Ex. Roth IRA
Investment: not tax-deductible
Tax frequency: never
Tax-rate: Tax-exempt
rAcc = [$I x (1 + 𝑅)^𝑁]
Savings Vehicle VI
Ex: IRA deductible Investment: deductible Tax frequency: deferred Tax-rate: ordinary rate rAcc = [$𝐼 / (1 − 𝑡_𝑛 )] × (1 + 𝑅)^𝑁 × (1 − 𝑡_𝑛 ) or [$I x (1 + 𝑅)^𝑁]
Which SAV(s) allows for a deductible investment?
Only SAV VI allows for a deductible investment. Pretax earnings in VI accumulate at a pretax rate, then are taxed at the ordinary rate
Which SAV(s) require annual taxation on earnings?
SAV I and SAV III
After-tax investments are taxed, then accumulated
Which SAV(s) require deferred taxation on earnings?
SAV II, SAV IV, and SAV VI
After-tax investments in II and IV accumulate at the pretax rate, are taxed on recognition, then add back the (tax-rate at recognition x the investment) to accumulated earnings
Pretax earnings in VI accumulate at a pretax rate, then are taxed at the ordinary rate
Which SAV(s) is (are) never taxed?
SAV V
After-tax investments accumulate at the pretax rate
Which SAV(s) require taxation at the ordinary rate?
SAV I, SAV II, SAV VI
Which SAV(s) require taxation at the capital gains rate?
SAV III and SAV IV
Which SAV(s) enjoy a tax exemption?
SAV V
