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Read the scenario to complete each of the tasks that follow. Taxes are one of the...

Read the scenario to complete each of the tasks that follow.

Taxes are one of the largest factors affecting investors’ returns. Because of taxes, it makes sense to fund your retirement through so-called tax advantaged accounts (IRAs, 401(k)s, and the like). Suppose, you have access to one of these accounts.

  1. Compare a $5,000 a year investment in a tax-free account versus a similar annualinvestment in a regular taxable account over the next 25 years.
  2. Assume the rate of return of 10% per year on both accounts and a tax rate of 20% on long term capital gains (all of the taxes are deferred until retirement). Calculate the difference in the accounts' values after 25 years.
  3. Discuss the implications for your own retirement savings.
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