## Related questions with answers

After completing his Certified Financial Planner designation (CFP), Andre was excited about the prospects of working with small business owners and their employees regarding retirement planning. Andre wanted to show the value of an annuity program as one of the viable investment options in a salary reduction retirement plan. In addition, he wanted to demonstrate the substantial tax benefits that annuities can provide. For instance, qualified annuities (by definition) not only reduce your current taxable salary, they also accumulate earnings on a tax-deferred basis-meaning you don't pay taxes on the earnings until they are withdrawn. Andre was developing a spreadsheet to show the way that annuities could grow using various rates of return.

Using the same information from Exercise earlier and assuming a $25 \%$ tax bracket, what would be the net effect of investing at $8 \%$ for $20$ years if taxes on the earnings were paid from the investment fund each year? How would this compare if no taxes had to be paid, such as in a tax-deferred annuity at $8 \%$ for $20$ years?

Solution

VerifiedInvesting at $8\%$ for $20$ years if taxes of $25\%$ on the earing were paid from the investment fund each year means that the annual interest of $8\%$ is actually smaller for $25\%$ so it is equal to $6\%$.

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