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Accountancy

Derek Ha will save $5,000 p.a. every year for 10 years. At the end of the 10 years he will convert his savings to an ordinary annuity that pays an equal amount at the end of each year for the next 10 years. The annuity interest rate is 4% p.a. His marginal tax rate during the first 10 years will be 40%. His marginal tax rate during the 10 years when he is receiving the annuity will be 25%. He has three possible plans for the account he saves the money in. Plan 1 He deposits the $5,000 into an RRSP. He deposits the tax refund amount into a TFSA. Both accounts earn 6% p.a. for the entire 20 years. Assume the deposit into the RRSP and the tax refund deposit into the TFSA occur at the end of the year. He then buys a 10 year annuity at an interest rate of 4%. For this question we will assume that you can buy the 10 year annuity inside the TFSA and hence you will pay no income tax as you withdraw the annuity payments. What is the annual amount of the annuity after-tax under this plan?

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