Question

Your company sponsors a 401(k) plan into which you deposit 10 percent of your $89,000 annual income. Your company matches 50 percent of the first 5 percent of your earnings. You expect the fund to yield 8 percent next year. Assume you are currently in the 31 percent tax bracket. a, What is the total annual investment in the 401(k) plan at year-end? b, What is your one-year return?

Answer 1

a). Employee's Contribution = $89,000 x 0.1 = $8,900

Tax savings = $8,900 x 0.31 = $2,759

Employee's cost = $8,900 - $2,759 = $6141

Employer's match = $89,000 x 0.50 x 0.05 = $2,225

Total 401(k) investment at year start = $8,900 + $2,225 = $11,125

One year return:

1-year earnings = $11,125 x 0.08 = $890

Total 401(k) investment at year-end = $11,125 + $890 = $12,015

b). Employee's one year return = ($12,015 - $6141) / $6141 = 95.65%

if any doubts please mention in comment