In 2018, Nina contributes 11 percent of her $119,000 annual salary to her 401(k) account. She...

In 2018, Nina contributes 11 percent of her $119,000 annual salary to her 401(k) account. She expects to earn a 5 percent before-tax rate of return. Assuming she leaves this (and any employer contributions) in the account until she retires in 25 years, what is Nina’s after-tax accumulation from her 2018 contributions to her 401(k) account?

a.) Assume Nina’s marginal tax rate at retirement is 30 percent.

b.) Assume Nina’s marginal tax rate at retirement is 20 percent.

c.) Assume Nina’s marginal tax rate at retirement is 40 percent.

Solutions

Expert Solution

Solution:-

a.) Assume Nina’s marginal tax rate at retirement is 30 percent:-

$13,298 Computed as follows:-

Before tax contribution	13,090
Times future value factor	* 1.05²⁵	5% annual rate for 25 years
Future value of contribution	$44,327
Minus: taxes payable on distribution	13,298	($44,327 * 30% tax rate)

b.) Assume Nina’s marginal tax rate at retirement is 20 percent:-

$8,865 Computed as follows:-

Before tax contribution	13,090
Times future value factor	* 1.05²⁵	5% annual rate for 25 years
Future value of contribution	$44,327
Minus: taxes payable on distribution	8,865	($44,327 * 20% tax rate)

c.) Assume Nina’s marginal tax rate at retirement is 40 percent:-

Before tax contribution	13,090
Times future value factor	* 1.05²⁵	5% annual rate for 25 years
Future value of contribution	$44,327
Minus: taxes payable on distribution	17,731	($44,327 * 40% tax rate)

ekkarill92 answered 1 week ago

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