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You have a 12 year old child who will be going to

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25.You have a 12 year-old child who will be going to college in sixyears, at the age of 18.You are considering investing 6,000 a yearuntil then, so that when she does go to college you can help her outwith tuition.However, you think that you may need the 24,000 thatyou will have invested by the time she is 16 in order to buy her acar.You should:a.Invest the 6,000 a year in a taxable account in your name.b.Invest the 6,000 a year in a taxable account in her name.c.Invest the 6,000 a year in a Roth IRA in your name.d.Invest the 6,000 a year in a deductible IRA in your name.e.Invest the 6,000 a year in lottery tickets.C is the correct answer.Under the Roth IRA rules, you can alwayswithdraw the principal tax-free and penalty-free, no matter when youwithdraw the principal and no matter how you use the proceeds.So,withdrawing the 24,000 when your child turns 16 would not result inany taxation to you in the Roth IRA scenario, which is not true withthe deductible IRA scenario.Regardless of whether or not youwithdraw the principal when she is 16, any amount that you withdrawto pay for her college when she is 18 is tax-free and penalty-free to theextent it represents principal, and penalty-free (but not tax-free) tothe extent it represents earnings on the principal.This problemillustrates the flexibility associated with Roth IRAs, relative todeductible IRAs.
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26.You are 25 years old and your current ordinary income tax rate is33%.You plan on retiring in 40 years, when you anticipate thatyour ordinary income tax rate will be 28%.Your employer iscurrently in the 25% tax bracket and will be in the 35% tax bracketin 40 years.What is the respective after-tax cost to your employer of $1 salary and $1contribution to a pension plan?After-tax cost of:$1 salary$1 pension contribution
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Term
Fall
Professor
Masten
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