Question

Your company sponsors a 401(k) plan into which you deposit 12 percent of your $65,000 annual income. Your company matches 50 percent of the first 5 percent of your earnings. You expect the fund to yield 8 percent next year. Assume you are currently in the 31 percent tax bracket.

a. What is the total annual investment in the 401(k) plan at year-end? (Round your answer to the nearest whole number. (e.g., 32))
b. What is your one-year return

Answer 1

Solution:-

To Calculate Total Annual Investment in the 401(k) plan at year end-

Employee's Contribution = $65,000 * 0.12 = $7,800

Tax Savings = $7,800 * 0.31 = $2,418

Employee Match = $65,000 * 0.50 * 0.05 = $1,625

Employee's Cost = Employee Contribution - Tax Savings

Employee's Cost = $7,800 - $2,418

Employee's Cost = $5,382

Total Investment at year start = Employee's Contribution + Employee Match

Total Investment at year start = $7,800 + $1,625

Total Investment at year start = $9,425

One Year earnings = $9,425 * 0.08

One Year earnings = $754

Total Investment at year end = Total Investment at year start + One Year earnings

Total Investment at year end = $9,425 + $754

Total Investment at year end = $10,179

To Calculate One year Return-

Return =

Return =

Return = 89.13%

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