Question

Use the following information for the next four problems. You are going to invest $6,500 for the next 40 years. You expect to earn 10% per year on your investment. You expect that the tax rates of 15% on long-term capital gains and 24% on short-term capital gains will still be in effect in 40 years. You also expect that your current marginal tax rate on income of 24% will still be in effect in 40 years. Thus, any money you withdraw that is considered "ordinary income" will be taxed at this 24% rate. Also, assume that any tax savings resulting from your $6,500 investment is put in an after-tax account with unrealized gains. Please include this amount (where relevant) in your answer. If you take all of the money out in 40 years, how much after-tax money will you have if you invest in.

Answer 1

To find the after-tax value of the investment after 40 years, calculate the future value of the investment using compound interest and deduct the taxes on the gains.

Step-by-step explanation:

To find the after-tax value of your investment at the end of 40 years, we need to consider the tax rates and the compound interest earned. First, let's calculate the future value of your investment:

FV = PV (1 + r)^n
FV = $6,500 (1 + 0.10)^{40}
FV = $284,807.38

Now, let's calculate the taxes on the gains. The investment grew by $278,807.38 over 40 years. Assuming a long-term capital gains tax rate of 15%, the tax on this amount would be $41,721.11. Therefore, the after-tax value of your investment would be:

After-tax value = FV - Tax on gains
After-tax value = $284,807.38 - $41,721.11
After-tax value = $243,086.27