Suppose that you are going to save $4,000 of your income for one year, after which you will spend it along with any accumulated interest you earned. Assume that your marginal income tax rate is 30%. Consider the following two options:
Option 1: Invest in a regular savings account earning 10% interest.
Option 2: Invest in an individual retirement account earning 10% interest.
Determine the after-tax value of your savings a year from now under both options. If the amounts are the same, explain why they’re the same. If the amounts are different, explain why they’re different.