A nonprofit organization offers a 5% salary contribution to John's 403b plan regardless of his own contributions, plus a matching 5% when John contributes 5% of his salary. John makes $56,000 a year. He is in the 24% tax bracket.
What is John's total cost of his 5% contribution net of taxes?

Question

Quizplus · Accepted Answer

John's contribution net of taxes is $2,100, (0.05 × $56,000 = $2,800; net contribution = $2,800(1 − 0.24) = $2,128). The employer's total contribution of 0.05 × $56,000 = $2,800 is also saving taxes for John. The tax saved is 0.24 × $2,800 = $672. So John's total cost is $2,128 − 1,344 = $784. The short formula is $56,000[0.05 − 0.05(1 − 0.24)] = $700.

A Nonprofit Organization Offers a 5% Salary Contribution to John's