Ch. 11:  Introduction to Tax Shelters

11.0 Introduction

            In the next few chapters, we will learn about key vehicles one can use to avoid taxes.  Tax avoidance is the fully legal process of employing strategies that reduce one’s taxes.  That probably didn’t need to be defined, but sometimes people conflate tax avoidance with tax evasion, illegal practices to skip-out on taxes. 

            There are different terms we can use to identify the tools we can use to avoid taxes.  Generically, we might refer to any government-permitted tax avoidance devices as tax shelters.  Tax shelters are, to some extent, designed to incentivize behaviors that help the “greater good”.  For example, if you save and invest in your 20s and 30s, society will not need to support you when you are in your 80s.  As such, most tax shelters are retirement vehicles that offer tax-advantaged saving and investing, with the caveat that the money cannot be accessed until a person reaches retirement age. 

            When you contribute to a tax-shelter, you might have the option of whether your contribution is traditional or Roth.  This is one of these key financial decisions that you must make.  Let’s explore.

11.1 Traditional Accounts

            Many tax shelters offer investors the key decision of whether their contributions are traditional or Roth.  Traditional accounts are used to avoid taxes this year.  If you make a $1,000 traditional contribution, you will effectively “shelter” this $1,000 so that it is no longer taxed as income this year.  But, when you withdraw the money, you will then pay income taxes on the full amount at whatever future tax rate applies.  Using the table below, let’s build an example. 

In 2025, Selena graduates from college and gets her first full-time job, working as a data analyst.  Her 2025 salary will be relatively low because she graduated in May and began her job in July.  Selena will earn $28,000 in 2025.  If she does not make any tax-sheltered contributions, how much federal income taxes will she pay? 

(*DISCLAIMER:  This is not a correct answer, but it will help us understand how tax shelters work.  We have not yet learned about deductions and tax credits.  We will circle back to this topic chapter 19.*)

Income = $28,000

Taxes Paid = ($11,925)(0.1) + ($28,000 - $11,925)(0.12) = $3,121.50

Now, suppose that Selena decides to make a $5,000 traditional contribution to a tax shelter.  Her salary is still $28,000.  How much income taxes will she pay in 2025?

Taxable Income = $23,000

Taxes Paid = ($11,925)(0.1) + ($23,000 - $11,925)(0.12) = $2,521.50

When Selena makes a $5,000 traditional contribution, this will reduce her taxable income by $5,000—the government "pretends" those earnings never happened and taxes her as if she only earned $23,000.  Traditional tax-sheltered contributions will also reduce Selena’s taxable state income.  But unfortunately, will not affect Social Security of Medicare taxes.[1]

            Decades later, Selena will withdraw money from her traditional account.  At this point, the full value of her withdrawal will be taxed as income.  When she is 70 years old, she might have $20,000 in income as a part-time worker.  If she withdraws $50,000 from her traditional account, she will now be taxed as if she has $70,000 in income.  What tax rates will she pay?  Who knows!  Future tax rates are unknowable.  The uncertainty of future taxes certainly makes tax planning very tricky. 

11.2 Roth Accounts

            Alternatively, you might decide to make Roth contributions.[2]  Roth accounts are used to avoid future taxes.  When you contribute to a Roth account in 2025, your 2025 taxes are not impacted.  But, when you withdraw money in the future, you will not be taxed again.  Let’s look back at Selena, she earned a $28,000 salary in 2025.  If she makes no tax-sheltered contributions, she will be taxed on the full $28,000, paying $3,121.50 in taxes.  If she decides to make a $5,000 Roth contribution, she will still have $28,000 in income and pay $3,121.50 in federal income taxes.  But her $5,000 in Roth contributions will never be taxed again. 

  It's best to contribute to Roth accounts when you are in a low marginal tax bracket today and expect to be in a higher tax bracket when you are withdrawing from accounts.  A lot of young investors falsely believe they will have no income during retirement.  During retirement you will be collecting Social Security Income, maybe working part-time, possibly receiving pension payments, and likely withdrawing from traditional accounts.  For someone like Selena, who is only in the 12% tax bracket this year, she is wise to use Roth investments.  By contributing to a Roth account, she is effectively choosing to pay a 12% tax today to avoid whatever tax bracket she is in in the future.  In the coming years, when Selena’s income is higher, she will likely be in a higher bracket, so traditional accounts might make more sense.  It’s normal for investors to change their preferred contribution method regularly during their working lives, or even contribute to both traditional and Roth accounts simultaneously.

  It’s a subtle thing… but $5,000 in Roth contributions are more expensive than $5,000 in traditional contributions.  To make a $5,000 contribution to a traditional account, you merely need to divert $5,000 in untaxed income.  But to make $5,000 in Roth contributions, you must first pay the taxes and then make the contribution.  Since Selena is in the 12% tax bracket, it would take $5,618.82[3] in raw income (of which $618.82 is taxed) to generate a $5,000 Roth contribution.   Similarly, someone possessing a Roth account that has $100,000 has more wealth than someone holding $100,000 in traditional accounts. The Roth accounts have already been taxed, but the traditional accounts have not (but will be at withdrawal).

11.3 Traditional vs. Roth vs. Brokerage

The image above compares three methods through which one can invest.  Let’s compare.  For these methods, imagine an investor earns income from their job, invests it, and then withdraws from their accounts during retirement.  Each option has a unique advantage; thus, smart investors will typically use brokerage, traditional, and Roth accounts. 

• No Shelter:  With no shelter, the investor is doomed to pay severe taxes in their brokerage account.  When they earn income from their job, they will pay income taxes.  As their investments grow in their taxable accounts, they will be required to pay taxes on any dividends that they earn along the way.  At retirement, they will pay capital gains taxes on the profits generated from their investments, as discussed in Chapter 9.  The taxes you must pay suck.  They really do.  But, this account provides you with liquidity.  If you need to withdraw money for a downpayment on a house, a new car, or whatever, tax shelters are usually not viable options.[4]  So, you probably want to have some money in a brokerage account, but, ideally, you will use tax shelters for the bulk of your retirement funding.

• Traditional Account:  Using a traditional account, the investor is only taxed once, when they withdraw money from their traditional account at retirement.  When you earn income as a worker, your contributions to the traditional account are not taxed as income, so your money is invested tax-free.  But, when you withdraw during (typically) retirement, you will pay taxes on the full amount that is withdrawn (not just the profit from your investments).  This is especially useful for investors that are in a high tax bracket today but expect to be a lower tax bracket during retirement.

• Roth Account:  Using a Roth account, the investor is only taxed one time, when they earn income as a worker (and contribute to their Roth account).  When they withdraw money from the account as a retiree, they do not pay any taxes.  Roth accounts are especially useful for investors that are in a low tax bracket today but expect to be in a high tax bracket during retirement.

Another important piece of info for you… Transactions made within a tax shelter—whether it is Roth or traditional—have no impact on taxes.  Earning dividends, for example, does not a taxable event in a Roth or traditional account.  Likewise, if you sell stock in your tax shelter, you do not need to worry about paying any taxes.  In a brokerage account, dividends are taxable (you learned about this last chapter, right?) as either income or capital gains and you also must deal with taxes when you sell shares of a stock for a profit.  As long as you keep your tax shelter in-tact, you will not have any “taxable events”.  The only time you need to worry about taxes is when you make a withdrawal from a traditional account.[5]  This is another nice advantage! 

11.4 Traditional or Roth – Life Trajectory

            The choice of whether to contribute to a traditional or Roth account can be a difficult choice.  If you work for a for-profit company, it’s likely that you will be offered the opportunity to contribute to a 401(k).  This plan will not only help you avoid taxes, but typically includes a company match.  This means that when you make contributions to your 401(k), whether traditional or Roth, your company will contribute extra for you!  You certainly want to take advantage, but choosing whether to contribute using traditional or Roth methods is a difficult decision.  Once a contribution is made, it can’t be undone.  For example, if you put $1,000 into a Roth account, you cannot convert it back to traditional, but you usually have the flexibility to switch back and forth between traditional and Roth accounts (or both) when you make contributions in the future. 

  To understand which plan is best, let’s consider a few examples.  A key factor for decision-making is one’s marginal tax rate.  Plan to refer to the tax table quite often.  For simplicity let’s assume everyone is single.

Example 1:  In 2025, Mandy is a 40-year old VP of operations.  She is earning $210,000 this year, the most she has ever earned.  She plans to change jobs next year to find something with a better life-work balance (probably earning about $100,000).  During retirement, she expects to have an income of $60,000[6] and will withdraw about $50,000/year from investment accounts to pay for expenses—these withdrawals will be her only source of money.

• Recommendation:  Mandy is tailor made for traditional contributions.  She is in the 35% marginal tax bracket this year and her income in the near future and during retirement will be low.  She needs to reduce her taxes now when she is in the highest tax bracket of her life.  Her 2025 traditional contributions should be traditional.

Example 2:  In 2025, Selena graduates from college and gets her first full-time job, working as a data analyst.  Her 2025 salary will be relatively low because she graduated in May and began her job in July.  Selena will earn $28,000 in 2025. 

• Recommendation:  Selena is in the 12% marginal tax bracket.  This is a no-brainer.  Traditional contributions will only allow her to avoid 12% taxes (and remember that she will have to pay taxes at withdrawal if she contributes to traditional accounts now).  She should contribute to a Roth account in 2025.  If you’re a college student taking my class, the first year of working is almost always a no-brainer—use Roth accounts only.

Example 3:  In 2025, Gary is 46 years-old and an accountant earning $90,000.  His salary hasn’t changed much in the last ten years and probably won’t change much in the future.  During retirement, he plans to withdraw about $80,000/year from accounts, roughly maintaining his current lifestyle. 

• Recommendation:  This kind of case has no perfect answer.  He’s in the 22% bracket now and will probably be in the 22% bracket in the future.  If his future pans-out as expected, and tax rates don’t change, traditional and Roth accounts will offer identical tax savings.  If he contributes to a traditional account, he will avoid a 22% tax rate today, but will pay 22% taxes when he withdraws.  If he contributes to a Roth account, he will pay 22% taxes now, but avoid paying 22% taxes during retirement.  (If it were me, I would use a Roth account, as I will explain in section 11.5)

11.4 Future Tax Rates

            When we consider whether to use traditional or Roth accounts today, we must consider our future income.  This is not easy since we don’t have a great understanding of what the future holds.  But this is not the only important uncertainty to consider.  Future tax rates will also play an important role.  If the federal (and state) governments raise taxes in the future, we will be keen to avoid these high future rates—thus, we might opt for Roth contributions today.  If instead, future tax rates are lower, then workers have a greater incentive to use traditional vehicles today since avoiding future taxes is less important.

            The future is so very hard to predict, but let’s do our best to make an educated guess.  Will future income tax rates be higher or lower than they are today?  To answer this question, we might look back at historical tax rates and see if there are any trends.  Have tax rates trended up or down?  Neither really… tax rates (whether measured by effective tax rate or one’s marginal tax rate) have changed very little over the last 30 years.  So that doesn’t help us. 

            But there are reasons to believe, in my opinion, that tax rates will be higher in the future.  The US government’s total government debt surpassed $34 trillion at the beginning of 2024.[7]  This is an almost impossibly high number.  To better understand our debt situation, we might consider how the US total government debt compares to the U.S.’s gross domestic project (GDP), which measures the total productivity of the country.  In 2023, US GDP was roughly $27 trillion.  The debt-to-GDP ratio in the US is thusly about 1.26 (or 126%).[8]  Let’s see how the US’s debt-to-GDP ratio has changed through time.

As indicated, the US debt-to-GDP ratio today is very high.  While the last few years have allowed for a favorable downtrend in this key ratio, the long-term trend is up-up-up.  I don’t pretend to know what this means about our future, but if I were a betting man (I am), I would wager that the government is more likely to raise taxes in the future than lower them.  Tax rates have been unsustainably low since the early 1980s.  At some point, this debt problem will need to be addressed by either raising taxes or cutting government programs.

            We might also consider the changing political landscape of our nation.  Younger Americans (Gen-Z and Millennials) are far more liberal than prior generations, and this isn’t just an age thing.  While it’s typical for folks to become more conservative as they age, Millennials and “Zoomers” are not aging out of liberalism at the same rate as prior generations.  In 2010, 68% of young Americans viewed capitalism favorable; in 2018, only 45% did.[9] This may mean nothing, but if I had to guess, a more liberal future likely means higher taxes.

            Based on my arguments provided above, I would guess that future taxes rates will be higher than they are today.  So, I’m leaning more towards Roth contributions in my current tax shelters.  But this is just like my opinion, man.  I certainly could be wrong.

11.5 Traditional or Roth – Flexibility

            Finally, there is a hidden benefit of Roth investing that you should not ignore.  Let’s compare two individuals: Bella and Charlie.  Bella and Charlie have both recently retired and are 64 years old.  Each is earning about $100,000 in income during retirement.  Bella holds $1.2 million in traditional investments.  Charlie has $1.0 million in Roth investments.  Because Bell’s traditional investments will still need to be taxed, their tax-adjusted net worths are similar.  They’ve effectively lived very similar lives but made different tax decisions. 

  Now suppose that each of these individuals want to use their investments to buy a $700,000 house, using cash.  If Charlie withdraws $700,000, how much tax will she pay?  None!  Since she is withdrawing from a Roth account, the money can be spent tax-free.  What about Bella?  If Bella withdraws $700,000, she will taxed like a person that is earning $800,000 in income because, well, she is.[10] This is bad!  Most of the money will be taxed at the 32%, 35%, and 37% marginal tax brackets.  Traditional accounts work just fine when a person makes similar sized withdrawals every year.  But if a person wants to make a large withdrawal, traditional accounts are taxed to hell and back. 

  This flexibility benefit for Roth accounts can help a person make a decision in marginal cases.  For example,  If I think I’m going to be in the 22% tax bracket today and in the future, the tax benefits of traditional and Roth accounts are identical.  I can avoid the 22% tax today (contribute to traditional accounts) or avoid the 22% tax in the future (contribute to Roth accounts).  But I would typically choose Roth accounts in this scenario, since I can make large withdrawals from a Roth account at any time in the future without triggering a massive tax bill.

11.6 Why not do both?

            Diversification is good and the traditional-Roth choice allows us to diversify from a tax standpoint.  We don’t have to just choose traditional or Roth accounts, we can have both!  You will have both.  If you don’t, you’ve made some poor choices.  Consider five reasonable scenarios below.

These recommendations are pretty straightforward.  If you know your income is going to be much lower in the future, you want to use a traditional account today.  But people don’t know this, especially when they are just getting started in their career. 

  Instead, we might consider the probability of each of the above scenarios.  Perhaps you believe there is a 50% chance your income is much higher in the future (when you are withdrawing from accounts) and a 50% chance it will be lower.  Then maybe you want half of your contributions to traditional and half to be Roth… or maybe 60% Roth/40% traditional since you value the flexibility Roth accounts offer of being able to make large withdrawals without incurring taxes.  

  Or maybe you think there is a 20% chance tax rates will be lower in the future (when you are withdrawing) and an 80% chance rates will rise.  It might be reasonable to invest 80% of your funds in traditional accounts and 20% in Roth. But of course you would also need to consider expected future incomes relative to current incomes when making your decisions.

  Diversification across different assets is good.  So too is tax diversification.  By holding both traditional and Roth accounts, you reduce risk.  If future taxes rise (due to higher income or higher tax rates), you will be happy that you have traditional accounts.  If future taxes fall, your Roth accounts will come in handy. 

  Keep in mind that you can always change your contributions and diversification can occur very slowly.  During your 20s, when your income is relatively low, maybe all of your contributions will be made into Roth vehicles.  In your 40s, when your income is usually at its highest, you may primarily use traditional accounts.  Don’t be surprised if you make a few wrong choices or have to call some unexpected audibles.  A personal example… after having kids, my wife seriously considered quitting her job and becoming a stay-at-home mom.  For a few years, I made nothing by traditional contributions.  Why?  I knew that if she permanently quit her job, our income (and tax rate) would fall.  So I wanted to take advantage of traditional accounts while our incomes were relatively high.  We also increased our savings rate to prepare for a potential income drop.  But a couple of years later, my wife landed a job she loves and now has no intention to quit, so we switched to primarily making Roth contributions.  As our life goals change, so do our financial maneuvers. 

11.7 What’s next?

            Not all accounts are equal.  As we will soon learn, most will choose to invest in Roth Individual Retirement Accounts (IRAs) due to the specific regulations set forth in US regulations.  On the contrary, traditional 457(b) accounts are usually best (for workers that qualify to have one).  Understanding the specifics of each investment vehicle is critical.  In Chapter 11, we will start our analysis of specific tax shelters with a thorough investigation of 401(k) plans.

Key Terms

Company Match:  Some employer-provided tax shelters offer a company match, in which your contributions are matched by your employer.  For example, when you contribute $1,000 to a 401(k), your company might add $1,000 on your behalf. 

Debt-to-GDP Ratio:  A country’s government debt doesn’t tell the whole story about its debt situation.  If two countries have the same government debt, but one’s GDP is much higher, the country with the higher GDP is in a better debt situation.  Debt-to-GDP ratio is solved to simultaneously consider these two variable in one metric.  It’s found by dividing a country’s debt by its GDP.  If a country’s debt-to-GDP ratio is 0.5, for instance, then its debt is half the size of its GDP.   A ratio of zero would mean the country’s government has no debt.

Gross Domestic Product (GDP):  Total production of a country in a given year.

Retirement Vehicle:  Tax shelter that is designed to incentive saving for retirement.  These plans typically only allow withdrawals when a person is at least 59.5 years old.

Roth Account:  One of two primary styles of tax shelters.  Contributions to a Roth account do not have an impact on current taxes.  But when you withdraw from a Roth account, you are not taxed.  This account is best when your future marginal tax rate (when you withdraw from the account) is higher than your current marginal tax rate.

Tax Avoidance:  The legal act of making financial choices that reduce one’s taxes.  Typically, through the use tax shelters.

Tax Evasion:  The illegal act of making financial choices to avoid taxes that a person should be paying.  Don’t practice tax evasion unless you like jail.

Tax Shelter:  The US government has created several accounts that give special tax considerations to those that use them.  These accounts are called tax shelters.

Taxable Event:  Industry term for any action that triggers taxes is called a taxable event.  Earning a $4,000 bonus from your work is a taxable event.  Collecting dividends in a brokerage account is a taxable event.  Collecting dividends in a tax shelter is not a taxable event. 

Traditional Account:  One of two primary styles of tax shelters.  Contributions to a traditional account reduce your income taxes this year.  But when you withdraw from the account (usually during retirement) you will pay income taxes all of the money withdrawn.  This account is best when your future marginal tax rate (when you withdraw from the account) is lower than your current marginal tax rate.

End Notes

[1] The only exceptions are tax shelters that are connected to health insurance plans that are provided by an employer—HSAs and FSAs.  These are unique shelters that we will fully discuss in a later chapter.

[2] These accounts were named after a former senator, William Roth, who sponsored the bill that created the Roth Individual Retirement Account (IRA). 

[3] This can be found by dividing $5,000 by (1 – 0.12).  $5000/0.88 = $5,618.82

[4] The clear exception is Roth IRAs.  More on this in Chapter 13.

[5] Technically, it’s also possible to be forced to pay taxes when you withdraw from a Roth account, but this would only happen if you do something very odd and stupid.  The details of such instances depends on the specifics of the shelter you are using.  Upcoming chapters will discuss such scenarios.

[6] Remember that there can be many sources of income.  Even if she is retired, she can still be earning a regular paycheck from Social Security, a pension, etc.

[7] Many economists prefer to use “net public debt” when considering a government’s debt situation.  Net public debt excludes money than the government owes itself—for instance, the US government has been borrowing from the Social Security fund and now owes itself money.  The US net public debt is roughly $28 trillion.

[8] This is found by dividing $34T by $27T.  

[9]  Source.

[10] Remember that she is earning $100,000 in income already.  The additional $700,000 withdrawal will be added to this $100k. 

Practice Problems

1. Jase is single and earns $64,000 from this job.  He contributes $14,000 to a traditional account.  How much Federal income taxes will he pay?

Taxable Income = $64,000 - $14,000 = $50,000

Income Taxes = (11,925)(0.1) + (48,475 – 11,925)(0.12) + (50,000 – 48,475)(0.22) = $5,914

2. Jared is single and earns $64,000 from this job.  He contributes $14,000 to a Roth account.  How much Federal income taxes will he pay?

Since it’s a Roth account, Jared will pay taxes on all his income.

Taxable Income = $64,000 

Income Taxes = (11,925)(0.1) + (48,475 – 11,925)(0.12) + (64,000 – 48,475)(0.22)  = $8,994

3. Jacob is single and earns $64,000 from this job.  He contributes $14,000 to a traditional account and $14,000 to a Roth account.  How much Federal income taxes will he pay?

The traditional account reduces his income taxes, but the Roth has no impact on his current taxes.

Taxable Income = $64,000 - $14,000 = $50,000

Income Taxes = (11,925)(0.1) + (48,475 – 11,925)(0.12) + (50,000 – 48,475)(0.22)  = $5,914

4. Jackson is single and earns $64,000 from this job.  He contributes $14,000 to a brokerage account.  How much Federal income taxes will he pay?

This has no bearing on taxes. Contributions to a brokerage account do not affect taxes. Jared will pay taxes on all his income.

Taxable Income = $64,000 

Income Taxes = (11,925)(0.1) + (48,475 – 11,925)(0.12) + (64,000 – 48,475)(0.22)  = $8,994

5. A married couple, filing jointly, earns $198,000 in 2025.  They contribute $16,000 to a traditional account.  How much income taxes will they pay?

Use the married, filing jointly tax tables.

Taxable Income = $198,000 - $16,000 = $182,000

Income Taxes = (23,850)(0.1) + (96,950 – 23,850)(0.12) + (182,000 – 96,950)(0.22)  = $29.868

6. A married couple, filing jointly, earns $198,000 in 2025.  They contribute $40,000 to traditional accounts, $19,000 to Roth accounts.  How much income taxes will they pay?

Taxable Income = $198,000 - $40,000 = $158,000

Income Taxes = (23,850)(0.1) + (96,950 – 23,850)(0.12) + (158,000 – 96,950)(0.22) = $24,588

7. Lauren currently earns $78,000.  She thinks she will earn a lot more in the future.  Even during retirement, she thinks she will have more income.  Based on this information, it sounds like Lauren should primarily make contributions to ________ accounts this year.

Roth accounts.  She should choose to pay taxes now while her income is relatively low.

8. Laney currently earns $44,000.  Based on this information, it sounds like Laney should primarily make contributions to ________ accounts this year.

Roth.  She is in the 12% marginal tax bracket so she should use Roth accounts.  A traditional account would only allow her to avoid 12% taxes… that’s not worth it!  Always choose to pay taxes now when you are in the 10% or 12% bracket.

9. Leigh currently makes $114,000.  She has no idea how much she thinks she will earn in the future, but she thinks the government will likely raise tax rates in the future.  Based on this information, it sounds like Leigh should primarily make contributions to ________ accounts this year.

Roth. She should choose to pay taxes now while tax rates are relatively low. If she uses traditional, she would be forced to pay income taxes in the future in tax rates are higher.

10. Lucy currently makes $130,000. She knows her income will stay the same in the future (even during retirement) and she knows the government will not change tax rates.  Based on this information, it sounds like Lucy should primarily make contributions to ________ accounts this year.

Roth.  There is no relative tax advantage to using Roth or traditional accounts based on her situation.  As discussed in the chapter, a person might want to make a huge withdrawal at some point in the future.  It’s better to make large withdrawals from Roth accounts.  So, she might as well contribute to Roth accounts now in case she needs to make a large withdrawal in the future.

11. Javon is single and earns $64,000 from this job.  He has already contributed $22,000 to a traditional account but he wants to invest more money.  Based on this information, it sounds like Javon should primarily make contributions to ________ accounts this year.

Roth.  Based on the contributions he has already made, he is now in the 12% marginal tax bracket.

12. The US government is in tremendous debt.  All else equal, this fact makes contributing to  _____ accounts more useful today.

Roth.  We can’t predict the future.  But the high debt today suggests the government may need to raise tax rates in the future.

13. Nadirah is single and has an income of $106,000 in 2025.  She makes no contributions to traditional shelters.  In a brokerage account, she earns a $400 dividend from a stock that she bought five years ago.  How much taxes will she pay on this dividend?

She will pay capital gains taxes on this dividend since it is held in a brokerage account and she has held the stock for more than 60 days.  Given her income, the dividend will be taxed at a 15% rate. 

Tax on the dividend = $400*0.15 = $60

14. Naveah is single and has an income of $106,000 in 2025.  She makes no contributions to traditional shelters.  In a brokerage account, she earns a $400 dividend from a stock that she bought five weeks ago.  How much taxes will she pay on this dividend?

She will pay income taxes on this dividend since it is held in a brokerage account and she has held the stock for 60 days or fewer.  Given her income, the dividend will be taxed at a 22% rate. 

Tax on the dividend = $400*0.24 = $96

15. Nathan is single and has an income of $106,000 in 2025.  In a traditional account, he earns a $400 dividend from a stock that he bought five years ago.  How much taxes will he pay on this dividend?

No taxes on the dividend.  The only time you pay taxes in a tax shelter is when you withdraw from a traditional account.

16. Noah is single and has an income of $106,000 in 2025.  In a Roth account, he earns a $400 dividend from a stock that he bought five months ago.  How much taxes will he pay on this dividend?

No taxes on the dividend.  The only time you pay taxes in a tax shelter is when you withdraw from a traditional account.

17. Hannah is single and earning $50,000/year.  Hannah has decided that she wants to use traditional contributions when she is in the 22% marginal tax bracket or higher.  If she is in the 10% or 12% marginal tax bracket, she wants to use Roth accounts.  She plans to contribute $10,000 to tax shelters. How much should she invest using traditional and how much should be allocated to Roth?

The 22% bracket “begins” at an income of $48,475.  She can contribute $1,525 to traditional accounts to drive her taxable income down to exactly $48,475.  She has now completely avoided the 22% bracket.  Her additional contributions should all be made to Roth accounts.

18. If a country has a GDP of $2 Trillion, what does this mean?

The country produces $2 Trillion worth of final products within its boundaries during (most likely the most recent) one year.

19. If a country has a GDP of $2 Trillion and a government debt of $8 Trillion, what is the country’s debt-to-GDP ratio?

4.  The country's debt is four times as large as its production.