Reference no: EM131731282

Question: Consider an investor in a current tax rate of 35% who anticipates a reduced tax rate of 20% in 10 years (after retirement). If the investor places money into a wrapper that offers tax deduction and tax deferment, what will the investor's after-tax rate of annual return be if the pre-tax rate is 6% and the time horizon is 10 years? The future value (1.791) is multiplied by the after-tax ratio (1 - 0.20)/ (1 - 0.35) = 1.231 to generate 2.2041. The 10th root of 2.2041 followed with subtraction of 1 generates the answer that the after-tax rate is 8.22%. Note the dramatic magnitude of the after-tax yield (8.22%), which exceeds the pre-tax yield (6%).