Question

Leslie participates in IBO’s nonqualified deferred compensation plan. For 2018, she is deferring 10 percent of her $300,000 annual salary. Based on her deemed investment choice, Leslie expects to earn a 7 percent before-tax rate of return on her deferred compensation, which she plans to receive in 10 years. Leslie’s marginal tax rate in 2018 is 32 percent. IBO’s marginal tax rate is 21 percent (ignore payroll taxes in your analysis). (Use Table 3, Table 4.) (Do not round intermediate calculations. Round your final answers to the nearest whole dollar amount.)

a. Assuming Leslie’s marginal tax rate in 10 years (when she receives the distribution) is 33 percent, what is Leslie’s after-tax accumulation on the deferred compensation?

b. Assuming Leslie’s marginal tax rate in 10 years (when she receives the distribution) is 20 percent, what is Leslie’s after-tax accumulation on the deferred compensation?

c. Assuming IBO’s cost of capital is 8 percent after taxes, how much deferred compensation should IBO be willing to pay Leslie that would make it indifferent between paying 10 percent of Leslie’s current salary or deferring it for 10 years?

Answer 1

Please do rate this .The answers are given below for options a ,b & c.Thanks.

In the present case ,Leslie contributed her 10% of salary to non qualified deferred

compensation plan.Her annual salary is $300000 and her marginal tax rate is 32%.

She expects rate of return on deferred compensation is 7% which she will receive

in 10 years.

1

Contribution

10% of Annual Salary

Annual Salary

$300,000

Marginal Tax Rate

32%

Leslie L annual contribution is to be calculated before tax savings

Computation of Annual Contribution of Leslie for the year 2018 as below:

Annual Contribution

10% * Annual Salary

10% *$300000

$30,000

e`

a

Under the given case it has been given that Leslie marginal tax rate is 33% when she

receives the distribution

Description

Amount-$

Explanation

Contribution to deferred plan

$30,000

10% of annual salary

Future value factor

1*(1+0.07)^10

7 % rate of return for 10 years

1.967151357

Future value of deferred compensation

E26*E28

Deferral amount after 10 years

$59,014.54

Less Tax savings distribution

E30*33%

Marginal rate of tax is 33%

$19,474.80

After tax proceeds from distribution

E30-E32

future value taxes

$39,539.74

Hence accumulated after tax of for the Leslie with marginal tax rate of 33% has been computed as $39540.

b

Under the given case it has been given that Leslie marginal tax rate is 20% when she

receives the distribution

Description

Amount-$

Explanation

Contribution to deferred plan

$30,000

10% of annual salary

Future value factor

1*(1+0.07)^10

7 % rate of return for 10 years

1.967151357

Future value of deferred compensation

E26*E28

Deferral amount after 10 years

$59,014.54

Less Tax savings distribution

E30*20%

Marginal rate of tax is 20%

$11,802.91

After tax proceeds from distribution

E30-E32

future value taxes

$47,211.63

Hence accumulated after tax of for the Leslie with marginal tax rate of 20% has been computed as $47212

c

Under the given case it has been given that Leslie rate of return is 8% while rest of others is same as marginal tax rate is 32%.

which it will be receiving the amount in 10 yrs and annual contribution is 10% when she will receive the disribution.

Description

Amount-$

Explanation

Contribution to deferred plan

$30,000

10% of annual salary

Future value factor

1*(1+0.08)^10

8 % rate of return for 10 years

2.158924997

Future value of deferred compensation

E26*E28

Deferral amount after 10 years

$64,767.75

Less Tax savings distribution

E30*32%

Marginal rate of tax is 32%

$20,725.68

After tax proceeds from distribution

E30-E32

future value taxes

$44,042.07

Hence after tax accumulation for Leslie under the rate of return 8% and marginal tax rate of 32% has been computed as $44042.