HI,
is it right to say that TEA is better if you can only invest 1000 USD NOW. Return 10 %, Tax 20 %, 10 y.
TAE - put 1000 (after tax), get 2594
TDA - put 1000, get 2075
or how you shold compare whem?
You generally choose one over the other if there is a cap on one of the accounts (after-tax), or if you expect tax rates to change in the future.
I think a TDA would only be superior to a TEA if tax rates are expected to fall in the future
I don’t think you can compare it like that. The way you have it, you are comparing pre-tax dollars and post-tax dollars. TEA should be reduced by the 20% tax rate to make the two amounts equivalent.
TEA: $1000 x (1- 20%) = $800 (1+10)^10 = $2,074
TDA: 1000 (pre-tax ) =( $1000 (1+10)^10 ) x (1- 20%) = $2,074
This assumes tax rates are the same. If tax rates are changing, then like Mr. Smart & jamespeer said, this analysis changes.
but if you can only put 1000 USD, where would you put? TDA or TEA? I guess TEA.
as MRSmart said - it is better if we have cap on one of the accounts (after-tax)