An employee uses his firm's 401(k)plan.If he decides to contribute $11,000 per year and pays an effective tax rate for all items at 28%,what is the reduction in her take home pay each year?

Question

Quizplus · Accepted Answer

The contribution to a 401(k) plan is made with pre-tax dollars, so the reduction in take-home pay is the contribution amount minus the tax savings. The tax savings is $11,000 * 28% = $3,080. Therefore, the reduction in take-home pay is $11,000 - $3,080 = $7,920.

An Employee Uses His Firm's 401(k)plan