John\'s employer offers a qualified 401(k) plan and will match John\'s contribut
ID: 2619949 • Letter: J
Question
John's employer offers a qualified 401(k) plan and will match John's contributions up to a limit of 3%of hsis salary. John's salary is $20,000 and he contributes 3% the first year. Assuming that all contributions are made at the end of the year, the plan earns 15% pre-tax return, and that John is in the 28% tax bracket, how much will he have in the plan at the end of year one? What is John's realized rate of return? ***Please show all work*** John's employer offers a qualified 401(k) plan and will match John's contributions up to a limit of 3%of hsis salary. John's salary is $20,000 and he contributes 3% the first year. Assuming that all contributions are made at the end of the year, the plan earns 15% pre-tax return, and that John is in the 28% tax bracket, how much will he have in the plan at the end of year one? What is John's realized rate of return? ***Please show all work***Explanation / Answer
John's salary = $ 20,000
John's contribution to the plan = 20,000*3% = $ 600
John's employer's contribution to the plan = 20,000 * 3% = $ 600
Total investment in plan = 600 + 600 = $ 1,200
Post tax return on plan = Pre tax return - Tax
Post tax return on plan = 15 - 28% = 10.8%
Therefore post tax $ return on plan = 1200 * 10.8% = $ 129.60
Value of plan at the end of Year 1 = John's contribution + his employer's contribution + post tax return on plan
Value of plan at the end of Year 1 = 600 + 600 + 129.60 = $ 1329.60
Total realized return on investment of $ 1200 = 129.60/1200 * 100 = 10.8%
Realized rate of return on John's own investment of $ 600 = ((1329.6-600)/600)*100 = 121.6%
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