Question

Finance - Sheryl and Carol work at the same company and make the same salary of $64,000 per year. Carol deposits 8% of their salary into their 401k and the company matches 25 cents for every dollar up to 8%. Sheryl does not put any money away.

If they are both in the 35% income tax bracket, how much more will Sheryl pay than Carol, assuming all other factors are equal? (401k plans are not immediately subject to income tax)

Answer 1

$1792

Explanation:

The problem statement tells you that the 8% of her salary that Carol puts in her 401(k) plan is not subject to income tax. Therefore, she is taxed on .08·64000 = 5120 less income than is Sheryl, so saves

0.35·$5120 = $1792

in income taxes over what Sheryl pays.