Question

Your company sponsors a 401(k) plan into which you deposit 8 percent of your $65,000 annual income. Your company matches 50 percent of the first 3 percent of your earnings. You expect the fund to yield 8 percent next year. Assume you are currently in the 31 percent tax bracket.

Required:
a. How many dollars did you invest out of your salary in your 401(k) plan this year?
b. What is your one-year return?

Answer 1

a. $6,669

b.85.87%

Step-by-step explanation:

Annual income = $65000

Employee deposit = 8%

= 65000*8%

= $5200

Tax rate given = 31%

Tax savings = $5200*31%

Tax savings= 1/$1,612

Net employee cost = $5200 - $1612

Net employee cost=$3588

Employer deposit = 65,000 * 50% * 3%

Employer deposit= $975

Total employee and employer investment = $5200 + $975

Total employee and employer investment= $6175

Given yield rate = 8%

a) Calculation to determine How many dollars did you invest out of your salary in your 401(k) plan this year

Using this formula

Total investment at end of year 1 = $6,175*(1+yield)

Let plug in the formula

Total investment at end of year 1=$6,175*1.08

Total investment at end of year 1= $6,669

Therefore How many dollars did you invest out of your salary in your 401(k) plan this year is $6,669

b) Calculation to determine your one-year return

Using this formula

One year return = (Year end investment - Employee net cost) / Employee net cost

Let plug in the formula

One year return= ($6,669 - $3588) / $3588

One year return=$3,081/$3,588

One year return= 0.8587*100

One year return= 85.87%

Therefore your one-year return is 85.87%