tax question(schweser) she, understand, question, investor

Makavelim3

On Page 248, Book 1 of Schweser,
about Q23, answer says “If investor pays current taxes at 20% and is willing to give up $2000
in consumption,she can contribute $2500 to TDA…”
i can’t understand this answer..
i think, if you give up $2000, you can contribute to $2000 to TDA and 2000*(1-0.2)=$1600 to TEA…
please correct my understanding..

infinitybenzo

2000/(1-0.2) = 2500. You contribute in the TDA with your BEFORE tax income thus deferring this tax 2500*.2= 500 into the future.
If instead of saving, you pay your tax and use the after tax for consumption: 2500* (1-.2) = 2000 – this is available for consumption.

grharmeyer

All it is saying that future taxes are higher (30%) than current (20%) which makes investing in tax-exempt account more profitable than TDA

Elliotbay

many thanks elcfa ,pupdawg82 !!!