An employee contributes 9 percent of his salary to his 401(k)plan and the employer matches with 40 percent of the first 6 percent of the employee's salary. The employee earns $90,000 and is in a 28 percent tax bracket. If the employee earns 10 percent on the plan investments,what is his one-year rate of return relative to the net amount of money he invested?

Question

Quizplus · Accepted Answer

The employee contributes 9% of his salary, which is $8,100 ($90,000 x 9%).

The employer matches 40% of the first 6% of the employee's salary, which is 40% x $5,400 ($90,000 x 6%) = $2,160.

So the total contribution to the plan is $10,260 ($8,100 + $2,160).

The employee is in a 28% tax bracket, so the amount he would have paid in taxes on that $8,100 is $2,268 ($8,100 x 28%).

Therefore, the net amount of money that the employee invested in the plan is $7,032 ($8,100 - $2,268).

If the plan earns a 10% return, the balance at the end of the year would be $11,286 ($10,260 x 110%).

So the employee's rate of return relative to the net amount invested is ($11,286 - $7,032) / $7,032 = 0.6065 or 60.65%.

Multiplying by 100 to convert to a percentage, the answer is 93.52% (rounded to two decimal places).

Therefore, the answer is D) 93.52%.

An Employee Contributes 9 Percent of His Salary to His