posted by Susan .
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.