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…
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.
All it is saying that future taxes are higher (30%) than current (20%) which makes investing in tax-exempt account more profitable than TDA
many thanks elcfa ,pupdawg82 !!!