Question

• You are a newly hired analyst at a top company
• Your starting salary is $80,000 year
• You are attempting to save about 10% of your income
• You have the following options for savings and investment.

1. A Company 401K Plan that matches the first 6% Pretax Contributions at a 50% Match rate
2. Your own Individual Retirement Account (IRA) with a balance of $5,500.
3. Your own Roth IRA with a balance of $1,250.
4. Your brokerage account with a balance of $2,500

how much would you save each year and in which savings options would you put the money?

Answer 1

As per given data :

• You are a newly hired analyst at a top company
• Your starting salary is $80,000 year
• You are attempting to save about 10% of your income

Hence, total savings per year be $ 8,000 ( i.e. $80,000 x 10%)

Analysis of Options given for Investment :

Options	1	2	3	4
Particulars	A Company 401K Plan that matches the first 6% Pretax Contributions at a 50% Match rate	own Individual Retirement Account (IRA) with a balance of $5,500.	own Roth IRA with a balance of $1,250.	brokerage account with a balance of $2,500
Amount available for Investment	$ 8,000 per year	$ 8,000 per year	$ 8,000 per year	$ 8,000 per year
Amount Invested In option	=$80,000 x 6% = $ 4,800	=$5,500	=$ 1,250	=$ 2,500
Amount in hand after if opting such option	= $ 3,200	= $ 2,500	=$ 6,750	= $ 5.500
Tax Benefit	Deductible from Total Income at the time of Investment and taxed at the time of maturity or withdrawal	Deductible from Total Income at the time of Investment and taxed at the time of maturity or withdrawal	Not allowed as deduction from total income but all amount invested with benefits are tax free	As per trade it is taxable
Type/ Benefit	Long term benefit	Long term benefit	Long term benefit	Short term benefit

It is recommended to invest in long term investments than short term one to gain more benefits.

Above person is coming under category of 22 % tax bracket :

Hence, as per limit under prescribed law such person will save tax at 22 % on investment made in option 1 and 2 .

Tax saving and planning will be as follows:

Invest in option 1 as to invest in A Company 401K Plan that matches the first 6% Pretax Contributions at a 50% Match rate

which is $ 4,800/- per year and company will invest the same.

And invest remaining $3,200 in option 2 own Individual Retirement Account (IRA) .

It will reduced tax of such individual of as $ 1,760 per year ( i.e. $ 8,000 x 22%)

Which such person can invested in Option 3 own Roth IRA with a balance of $1,250

Amount saved additionally in hands of such person be $ 510 per year ( $ 1,760 - $1,250)

Total Savings and Investments in hands of such person be = $ 9,760/- (i.e. $ 4,800 + $3,200 + $1,250+$ 510) per year