Facts: You estimate annual earned income from your employer at $60,000 plus a $3,000 bonus. In addition,
Question:
Facts: You estimate annual earned income from your employer at $60,000 plus a $3,000 bonus. In addition, you project $150 in interest and $300 in ordinary dividends. The maximum your employer will contribute to your traditional 401(k) plan is 50 cents for each dollar you contribute up to a maximum employer contribution of 3% of your annual earned income.
Personal Goal: Save 15% of your annual earned income. Determine for each of two Scenarios your after-tax contribution (out-of-pocket cost) to save that 15%.
Scenario 1:
1. What is the maximum amount your employer will contribute to your traditional 401(k) plan?...3%*63000.........................$__1890________
2. To get the employer’s maximum contribution, how much will you need to contribute to your traditional 401(k) plan?....2*1890.......$__3780___
3. Assuming you and your employer contribute these amounts, what will be the total contribution to your 401(k)?...1890+3780...$_5670
4. How much of your contribution is tax deductible to you?.......$__3780______3780
5. If you are in the 22% federal tax bracket, how much of your total contribution will you save in taxes?......0.22*3780..........$__831.6____
831.6
6. Of the total contribution (#3 above), how much after federal taxes came out of your pocket?.....3780-831.6...... $_2948.4__
7. What percentage (%) of the total contribution to your 401(k) (#3) was your after taxcost?.....2948.4/5670..................._____52____%
8. If your goal is to save 15% of your earned income, how much will you have to save to reach your goal?...0.15*63000.......$_9450
9. How much is already being saved in your 401(k) plan? $ 1890+3780= 5670________
10. How much more will you need to save to meet your goal?......$_9450 – 5670= 3780________
11. If you add the amount in #10 to your 401(k) plan, what is your out-of-pocket cost after deducting your 22% tax saving?...... 2948.4+ 3780= ___6728.4*0.78 =5248.1______
12. Including this additional amount, what is the total combined contribution of all parties to your 401(k) account?.................$_5670________
13. How much is your total after tax contribution to save 15%? $__5896.8_______
14. How much is being contributed by other parties?...................$__3553.2_______
15. What % was contributed by other parties?................................__37.6______%
16. What % was contributed by you on an after tax basis?............___62.4_____%
Scenario 2: Using the same “Facts” given above, calculate the following option which may also be available to you.
17. Suppose you decide to contribute to a Roth 401(k) plan, how much would you need to contribute to receive the maximum employer contribution?.............................................................$____3780______
18. Based on your contribution, how much will your employer contribute to your Roth 401(k) plan?......................................$___0_______
19. How much will your employer contribute to your traditional 401(k) plan?................................................................................$__________
20. If you are in a 22% federal tax bracket, how much of your contribution to your Roth 401(k) plan will be tax deductible?....................$_____0_____
21. Of the total contribution made by you and your employer, how much is tax deductible to you?.........................................$__0________
22. If your goal is to save 15% of earned income, how much will you have to save to reach your goal?.......................................$__________
23. How much is already being contributed by you and your employer?...................................................................................$_____5670_____
24. How much more do you need to save to reach your goal of 15%?......................................................................................$___3780_______
25. If you add the amount in #24 to your traditional 401(k) account to reach your goal, what will be your after tax cost of this amount?.........................................................................$___7371_______
26. What will be your total after tax cost to reach your goal of saving 15% of earned income under Scenario 2?..............$___2079_______
27. How much was contributed by other parties?........................$____2721.6______
28. What % was contributed by other parties?............................ ____28.8_____%
29. What % was contributed by you on an after tax basis?........ ___71.2______%
30. What % of the total contribution is in your Roth 401(k)?.....___40______%
31. How much of the amount in #24 could you have contributed to a traditional IRA?.................................................................$___2448.4_______
Concepts in Federal Taxation
ISBN: 9780324379556
19th Edition
Authors: Kevin E. Murphy, Mark Higgins, Tonya K. Flesher