Rachel, Who Is in the 35% Marginal Tax Bracket, Is

question 112

Essay

Rachel, who is in the 35% marginal tax bracket, is considering purchasing an annuity that will pay her $10,000 per year for the remainder of her life. Her life expectancy is 15 years. The cost of the annuity is $97,120, and the cost is calculated to yield her an expected 6% return on her investment. As an alternative, Rachel could place the $97,120
in a savings account yielding 6% and she could withdraw $10,000 each year for 15 years (reducing the value of the account to zero at the end of 15 years). How might the tax laws applicable to annuities affect Rachel's decision?

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Definitions:

Deuterostomes

A group of animals in which the anus forms from the first opening in the embryo, with the mouth forming later.

Cnidarians

A phylum of animals that are more complex than sponges, characterized by their radial symmetry, a central gastrovascular cavity, and the presence of cnidocytes; includes jellyfish, corals, and sea anemones.

Spiracles

External respiratory openings found in some animals, such as insects and some amphibians, that allow air to enter and exit the trachea.

Tracheae

Tubes in the respiratory system that conduct air to and from the lungs.