Tilly would like to invest $3,800 in before-tax income each year in a retirement account or in stock investments outside the retirement account. Tilly likes the stock investments outside the retirement account because they provide her with more flexibility and a potentially higher return. Tilly would like to retire in 35 years. If she invests money in the retirement account, she can earn 6% annually. If she invests in stock outside the account, she can earn 8% annually. Tilly is in the 25% marginal tax bracket.
a. If Tilly invests all her money in the retirement account and withdraws all her income when she retires, what is her income after taxes?
b. If Tilly invests all her money in stocks outside the? account, what are her savings at retirement (Hint: Remember that the income is taxed prior to investment.)
c. Assuming a capital gains tax rate of 15%, what is the after-tax value of the stock investments?
d. Should Tilly invest her money in the retirement account or in stocks outside the account?