I think there is an error in the answer of question 14 at the end of reading 9 (p. 264). It’s about the tax-deferred account and the accumulation of wealth.
The formula referring to Kaplan’s case that SHOULD be used imo is 50,000*[(1+0.07)^20*(1-0.20) + 0.20] --> refers to the income from stock that is put into the tax deferred account.
However, the answer is 50,000*(1+0.07)^20*(1-0.20)
In other words, CFAI does not adds the capital gains on stock of 20% at the end.
Do I miss something or is this an error? I asked a fellow of mine who couldn’t see the logic behind.
I was now able to re-solve the problem without problem. I guess I was confused with the different tax formulas and couldn’t differentiate between them.
Yea, the difference is that in the deferred account, you have to assume a zero basis so you should not add the tax rate at the end of the formula when you compute the future value of the deferred account. On the other hand, FVIF for capital gain basis is assumed 1 unless otherwise state differently.