Sally Rogers, an employee of Advanced Ideas, Inc. has a gross salary of $45,000 per year. Her company will match employee 401K contributions up to 5% of the gross salary.
Due to personal financial constraints, Sally is only able to put 2% of her salary into her 401K during her first two years. However, after receiving a 3.5% raise at the end of her first year and a 4.0% raise at the end of her second year, she is able to up her 401K contribution to 5% at the beginning of her third year.
To calculate Sally's annual 401K contribution, we first need to calculate her salary after the raises. Let's break it down step by step:
1. Calculate Sally's salary after the first year raise:
- Salary after 3.5% raise = $45,000 + (3.5% x $45,000)
- Salary after 3.5% raise = $45,000 + $1,575
- Salary after 3.5% raise = $46,575
2. Calculate Sally's salary after the second year raise:
- Salary after 4.0% raise = $46,575 + (4.0% x $46,575)
- Salary after 4.0% raise = $46,575 + $1,863
- Salary after 4.0% raise = $48,438
Now that we know Sally's salary after the raises, we can calculate her 401K contributions for each year:
Year 1:
- 2% of salary after first-year raise = 2% x $46,575
- 401K contribution in Year 1 = $931.50
Year 2:
- 2% of salary after second-year raise = 2% x $48,438
- 401K contribution in Year 2 = $968.76
Year 3 and onwards:
- 5% of salary = 5% x $48,438
- 401K contribution from Year 3 onwards = $2,421.90
So, Sally's 401K contribution is $931.50 in the first year, $968.76 in the second year, and $2,421.90 from the third year onwards.