Question

1.) You traditional IRA account has stock of GFH which cost $2,000 20 years ago when you were 50 years old. You have been very fortunate, and the stock is now worth $23,000. You are in the 35 percent income tax bracket and pay 15 percent on long-term capital gains.

            a.) What was the annual rate of growth in the value of the stock?

            b.) What are the taxes owed if you withdraw the funds?

Answer 1

a) Final value=$23000

    Initial value=$2000

    Time period= 20 years

    Growth rate = {(FV/IV)^(1/t)-1}*100

                        = {(23000/2000)^(1/20)-1}*100

                        = (1.129887-1)*100

                        = 12.98%

b) Since the stock is held for 20 years, the gains will be treated as long term capital gains and will be taxed at 15%.

Tax owed = 15%*(23000-2000)

                 = 0.15* 21000

                 = 3150