Your company sponsors a 401(k) plan into which you deposit 12 percent of your $60,000 annual income. Your company matches 50 percent of the first 5 percent of your earnings. You expect the fund to yield 10 percent next year. If you are currently in the 31 percent tax bracket, what is your annual investment in the 401(k) plan and your one-year return?
Your own contribution is 12% of 60,000 or $7200. Your employer contributes 50% of 5% of $60,000 or $1500. The total added value to the 401(k) is $8700. If the fund appreciates 10% next year you will have $9570. Your one-year return after taxes would be 69% of that, or $6003. You don't have to pay that income tax until you withdraw the money.
Remember that you paid no income tax on the 401(k) withheld money.
To calculate your annual investment in the 401(k) plan, we need to determine 5 percent of your income and then calculate 12 percent of that amount. Let's break it down step by step:
1. Calculate 5 percent of your income:
5% * $60,000 = $3,000
2. Calculate the investment amount into the 401(k) plan:
12% * $3,000 = $360
So, your annual investment in the 401(k) plan is $360.
Next, let's calculate the employer match. Your company matches 50 percent of the first 5 percent of your earnings. Since you are contributing 5 percent of your income, the employer match would be:
50% * $3,000 = $1,500
Now, let's calculate your one-year return. You expect the fund to yield 10 percent next year. The return can be calculated as a percentage of your combined contributions (your investment plus the employer match):
Your investment: $360
Employer match: $1,500
Total contributions: $360 + $1,500 = $1,860
Return on investment:
10% * $1,860 = $186
So, your one-year return is $186.
Remember, the tax implications on your 401(k) plan may vary depending on your individual circumstances, so it's always a good idea to consult with a tax advisor for accurate information.