Question

Compute the difference between accumulated savings (net of taxes) for $15,500 (pretax) placed in bonds yielding 5.5% in a qualified pension versus an investment in a municipal bond yielding 3.5%. The municipal bond sum deposited was made with after-tax dollars on the same pretax amount. The marginal tax rate was 28%. Assume that the sums were accumulated for 30 years and the pension was liquidated at that time.

Answer 1

accumulated savings placed in bonds = investment amount*(1+bond yield)maturity = $15,500*(1+0.055)30 = $15,500*1.05530 = $15,500*4.9839512883950661014203761586088‬ = $77,251.24

accumulated savings net of taxes = accumulated savings placed in bonds*(1-tax rate) = $77,251.24*(1-0.28) = $77,251.24*0.72 = $55,620.89

accumulated savings placed in municipal bonds = [pretax investment amount*(1-tax rate)]*(1+bond yield)maturity

accumulated savings placed in municipal bonds = [$15,500*(1-0.28)]*(1+0.035)30 = ($15,500*0.72)*1.03530 = $11,160‬*2.8067937047026336169838918321689‬ = $31,323.82

returns in municipal bonds are tax-free.

difference between accumulated savings (net of taxes) = accumulated savings net of taxes of bonds - accumulated savings placed in municipal bonds = $55,620.89 - $31,323.82 = $24,297.07