Question

Activity: Funding 401(k)s and Roth IRAs

Objective: The purpose of this activity is to learn to calculate 15% of an income to save for retirement and to understand how to fund retirement investments.

Directions: Complete the investment chart based on the facts given for each situation. Assume each person is following Dave’s advice of investing 15% of their annual household income. Remember to follow the sequence of contributions recommended in the lesson.

Investments	Annual Salary	Company Match	401(k)	Roth IRA	Total Annual Investment
Joe	$40,000	1:1 up to 5%
Melissa	$55,000	1:2 up to 6%
Tyler & Megan	$105,000	No Match
Adrian	$111,000	1:1 up to 3%
David & Britney	$150,000	No Match
Brandon	$35,000	2:1 up to 6%
Chelsea	$28,000	No Match

• Joe will take advantage of the company match (5% of salary) then put the rest in a Roth IRA
• Melissa will fund the 401(k) up to the match and put the remainder in her Roth.
• Tyler & Megan can each fund a Roth, then put the remainder in the 401(k). With no match, fund the Roth first (based on 2011 contribution of $5,000 per individual).
• Adrian is not eligible to open a Roth IRA because he makes too much money. He will put his entire 15% into his 401(k).
• David & Britney are still within the guidelines for a married couple (based on 2011 contributions of $5,000 per individual). After maxing out the IRA, they will fund the 401(k).
• Brandon will fund his 401(k) up to the match, then put the remainder in his Roth.
• Chelsea will fund her Roth IRA.

Answer 1

The completed table is given as below:

Investments	Annual Salary	Company Match	401(k)	Roth IRA	Total Annual Investment
Joe	$40,000	1:1 up to 5%	$2,000	$4,000	$6,000
Melissa	$55,000	1:2 up to 6%	$3,300	$4,950	$8,250
Tyler & Megan	$105,000	No Match	$5,750	$10,000	$15,750
Adrian	$111,000	1:1 up to 3%	$16,650	0	$16,650
David & Britney	$150,000	No Match	$12,500	$10,000	$22,500
Brandon	$35,000	2:1 up to 6%	$2,100	$3,150	$5,250
Chelsea	$28,000	No Match	0	$4,200	$4,200

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Notes

1) Joe's total investment would be $6,000 (40,000*15%). Out of this total investment, Joe will match upto $2,000 (5%*40,000) in 401k and will put the balance amount of $4,000 (6,000 - 2,000) in Roth IRA.

2) Melissa's total investment would be $8,250 (55,000*15%). Out of this total investment, Melissa will match upto $3,300 (6%*55,000) in 401k and will put the balance amount of $4,950 (8,250 - 3,300) in Roth IRA.

3) Tyler and Megan's total investment would be $15,750 (105,000*15%). Out of this total investment, Tyler and Megan will fund Roth IRA with a contribution of $10,000 (5,000*2) and put the balance amount of $5,750 (15,750 - 10,000) in 401K.

4) Adrian's total investment would be $16,650 (111,000*15%) which will entirely be put in 401K. The Roth IRA contribution would be 0.

5) David and Britney's total investment would be $22,500 (150,000*15%). Out of this total investment, David and Britney will fund Roth IRA with a contribution of $10,000 (5,000*2) and put the balance amount of $12,500 (22,500 - 10,000) in 401K.

6) Brandon's total investment would be $5,250 (35,000*15%). Out of this total investment, Brandon will match upto $2,100 (6%*35,000) in 401k and will put the balance amount of $3,150 (5,250 - 2,100) in Roth IRA.

7) Chelsea's total investment would be $4,200 (28,000*15%) which will entirely be put in Roth IRA.