If a recent college, age 22, starting out earning $48,000 per year has an opport

Question

If a recent college, age 22, starting out earning $48,000 per year has an opportunity to participate in an employer sponsored 401(k) tax sheltered retirement account with the employer matching the first $2,400 of annual contributions made by the employee, compute the following: A. If the individual employee is in the 25% marginal income tax bracket (including federal and state taxes) and invests $2,400 per year into the employer provided 401(k) tax sheltered retirement account, how much with the employee’s monthly net pay after taxes be reduced as a result of the $200 per month investment into the employer provided 401(k)? $_____________________________ B. How much total per year will be invested into the employee’s account, if the individual employee invests $2,400 per year and takes full advantage of the matching funds? (Include employee’s and employer’s contributions.) $______________________________ C. How much will the employee have in his or her 401(k) account in 20 years if a 10% average annual rate is earned on the account? $______________________________ D. How much will the employee have in the 401(k) account in 30 years if a 10% average annual rate is earned on the account? $______________________________ E. How much will the employee have in the 401(k) account at age 67 if a 10% average annual rate is earned on the account $______________________________

Explanation / Answer

B. If the employee takes complete advantage of matching contribution to the employees 401k then id would have $4800. The employer has no minimum requirement limit the contribution limit is $55000 for both employee and emplyer contribuition togther or 100% of your salary which ever is less. Therefore employer can contribute upto $45600 more and would not cost against employees personal contribution.

C. Calculate future value of the in the employees 401k after 20 years and 10% intrst rate average Assuming that the employees and employe total contribution is $4800 Per Year.

=4800*[{(1+0.10)20}-1]/0.10

=4800*57.27

=$ 274896

D. Calculate future value of the in the employees 401k after 30 years and 10% intrst rate average Assuming that the employees and employe total contribution is $4800 Per Year.

=4800*[{(1+0.10)30}-1]/0.10

=789,571.31

E.Calculate future value of the in the employees 401k after 44 year (23-67) years and 10% intrst rate average Assuming that the employees and employe total contribution is $4800 Per Year.

=4800*[{(1+0.10)44}-1]/0.10

=3,132,676

And assuming for 45 years (22-667) then

=4800*[{(1+0.10)45}-1]/0.10

=3,450,743

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