Reading 9, Ex. 11

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IamChris

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Reading 9, Ex. 11 Choosing among Account types
Isn’t today’s tax rate in a tax exempt account zero by definition?
My confusion is that Tzero is explicitly named in the formula for the FVtax_ex, it is assumed zero in the solution for C), but it states in the explanation that “B) and C) achieve the same after-tax accumulation assuming tax rates in the year of contribution (=Tzero) and withdrawal (=Tn) are the same”. And Tn is 25%.
 
Tax exempt account is based on after tax money, therefore already taxed. Tax deferred is before tax income, thus today’s tax rate is zero but will be taxed upon withdrawal.
If future tax rate and current tax rate is the same, you will end up the same in wealth. The strategy depends on the future tax policies and expected tax braket.
 
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