Question

Tom Shilling expects to have $10,000 of taxable income to commit to his retirement savings each year for the next 30 years. His investments will be made at the end of the year. His tax rate is 30% and his investments will earn 8% annually. If Tom invests in a taxable account, his annual investment is reduced by his income taxes, and his annual return on investments will also be reduced by 30%. If tom invests in a traditional IRA, he pays no taxes on the $10,000 taxable income, and his earnings compound at the pretax rate of return. However, in 30 years, all of his investment balances are subject to the 30% tax rate. A. Prepare a spreadsheet that shows the balance in the two accounts for the next 30 years. B. After taxes, what is the advantage of the IRA over a taxable account, both in dollars and as a percentage?

Answer 1

Taxable Account
	Opening Investment Balance	Income for the year	Tax Rate	Investment After Tax	Interest Rate	Interest	Tax Rate on Interest	Tax Amount on Interest	Closing Investment Balance
Year 1	0	10,000	0.3	7000	0.08	0	0.3	0	7000
Year 2	7000	10,000	0.3	7000	0.08	560	0.3	392	14392
Year 3	14392	10,000	0.3	7000	0.08	1151.36	0.3	805.952	22197.95
Year 4	22197.95	10,000	0.3	7000	0.08	1775.836	0.3	1243.085	30441.04
Year 5	30441.04	10,000	0.3	7000	0.08	2435.283	0.3	1704.698	39145.74
Year 6	39145.74	10,000	0.3	7000	0.08	3131.659	0.3	2192.161	48337.9
Year 7	48337.9	10,000	0.3	7000	0.08	3867.032	0.3	2706.922	58044.82
Year 8	58044.82	10,000	0.3	7000	0.08	4643.586	0.3	3250.51	68295.33
Year 9	68295.33	10,000	0.3	7000	0.08	5463.626	0.3	3824.538	79119.87
Year 10	79119.87	10,000	0.3	7000	0.08	6329.589	0.3	4430.713	90550.58
Year 11	90550.58	10,000	0.3	7000	0.08	7244.046	0.3	5070.832	102621.4
Year 12	102621.4	10,000	0.3	7000	0.08	8209.713	0.3	5746.799	115368.2
Year 13	115368.2	10,000	0.3	7000	0.08	9229.457	0.3	6460.62	128828.8
Year 14	128828.8	10,000	0.3	7000	0.08	10306.31	0.3	7214.415	143043.2
Year 15	143043.2	10,000	0.3	7000	0.08	11443.46	0.3	8010.422	158053.7
Year 16	158053.7	10,000	0.3	7000	0.08	12644.29	0.3	8851.005	173904.7
Year 17	173904.7	10,000	0.3	7000	0.08	13912.37	0.3	9738.662	190643.3
Year 18	190643.3	10,000	0.3	7000	0.08	15251.47	0.3	10676.03	208319.4
Year 19	208319.4	10,000	0.3	7000	0.08	16665.55	0.3	11665.88	226985.2
Year 20	226985.2	10,000	0.3	7000	0.08	18158.82	0.3	12711.17	246696.4
Year 21	246696.4	10,000	0.3	7000	0.08	19735.71	0.3	13815	267511.4
Year 22	267511.4	10,000	0.3	7000	0.08	21400.91	0.3	14980.64	289492.1
Year 23	289492.1	10,000	0.3	7000	0.08	23159.36	0.3	16211.56	312703.6
Year 24	312703.6	10,000	0.3	7000	0.08	25016.29	0.3	17511.4	337215
Year 25	337215	10,000	0.3	7000	0.08	26977.2	0.3	18884.04	363099.1
Year 26	363099.1	10,000	0.3	7000	0.08	29047.92	0.3	20333.55	390432.6
Year 27	390432.6	10,000	0.3	7000	0.08	31234.61	0.3	21864.23	419296.8
Year 28	419296.8	10,000	0.3	7000	0.08	33543.75	0.3	23480.62	449777.5
Year 29	449777.5	10,000	0.3	7000	0.08	35982.2	0.3	25187.54	481965
Year 30	481965	10,000	0.3	7000		0	0.3	0	488965

IRA Account
	Opening Investment Balance	Income for the year	Interest Rate	Interest	Closing Investment Balance
Year 1	0	10,000	0.08	0	10,000
Year 2	10000	10,000	0.08	800	20,800
Year 3	20800	10,000	0.08	1664	32,464
Year 4	32464	10,000	0.08	2597.12	45,061
Year 5	45061.12	10,000	0.08	3604.89	58,666
Year 6	58666.01	10,000	0.08	4693.281	73,359
Year 7	73359.29	10,000	0.08	5868.743	89,228
Year 8	89228.03	10,000	0.08	7138.243	106,366
Year 9	106366.3	10,000	0.08	8509.302	124,876
Year 10	124875.6	10,000	0.08	9990.046	144,866
Year 11	144865.6	10,000	0.08	11589.25	166,455
Year 12	166454.9	10,000	0.08	13316.39	189,771
Year 13	189771.3	10,000	0.08	15181.7	214,953
Year 14	214953	10,000	0.08	17196.24	242,149
Year 15	242149.2	10,000	0.08	19371.94	271,521
Year 16	271521.1	10,000	0.08	21721.69	303,243
Year 17	303242.8	10,000	0.08	24259.43	337,502
Year 18	337502.3	10,000	0.08	27000.18	374,502
Year 19	374502.4	10,000	0.08	29960.19	414,463
Year 20	414462.6	10,000	0.08	33157.01	457,620
Year 21	457619.6	10,000	0.08	36609.57	504,229
Year 22	504229.2	10,000	0.08	40338.34	554,568
Year 23	554567.6	10,000	0.08	44365.4	608,933
Year 24	608933	10,000	0.08	48714.64	667,648
Year 25	667647.6	10,000	0.08	53411.81	731,059
Year 26	731059.4	10,000	0.08	58484.75	799,544
Year 27	799544.2	10,000	0.08	63963.53	873,508
Year 28	873507.7	10,000	0.08	69880.61	953,388
Year 29	953388.3	10,000	0.08	76271.06	1,039,659
Year 30	1039659	10,000		0	1,049,659
Tax After 30 Years					314,898
Net income					734,762

Benefit in Dollars

=734762-488965

245,797