Question

Your company sponsors a 401(k) plan into which you deposit 10 percent of your $123,000 annual income. Your company matches 75 percent of the first 10 percent of your earnings. You expect the fund to yield 12 percent next year. Assume you are currently in the 31 percent tax bracket. a. What is your annual investment in the 401(k) plan? (Round your answer to the nearest whole number. (e.g., 32))b. What is your one-year return?

Answer 1

Answer:

A) Your own Contribution in 401(K) is $12,000.

B) Total Value of fund after one year = $21,000 × (1 + 12%)

= $23,520.

Explanation:

A) Total Annual Income = $120,000

Contribution in 401(K) = 10% of income  

= $120,000 × 10%

= $12,000

your own Contribution in 401(K) is $12,000.

Employee contribution after tax = $12,000 × (1 31%)

= $8,280

Contribution of employer = $12,000 × 75%

= $9,000

Total Contribution = $12,000 + $9,000

= $21,000

Total Contribution in one year is $12,000.

Yield on fund = 12%

Total Value of fund after one year = $21,000 × (1 + 12%)

= $23,520.

after tax return = ($23,520 -$8,280) / $8,280

= 184%

After tax return is 184%.

You don't have to pay that income tax until you withdraw the money