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Chapter 9: Problem 13

Nelson makes \(\$ 120,000\) per year. His employer offers a 401 \(\mathrm{k}\) plan in which they will match 40\(\%\) of his contributions up to a maximum of 7\(\%\) of his annual salary. His employer allows contributions up to a maximum of 15\(\%\) of Nelson's salary per year. If Nelson contributes \(\$ 200\) out of each biweekly paycheck, how much will his employer contribute to his 401 \(\mathrm{k}\) )

Short Answer

Expert verified
Nelson's employer will contribute \$2080 to his 401(k) annually.

Step by step solution

01

Calculate Total Employee Contribution

First, we need to determine how much Nelson contributes annually. We know that he contributes $200 every two weeks (bi-weekly). Since a year typically contains 52 weeks, divide that by 2 to get the number of bi-weekly periods in a year, which is \(26\). Multiply this by Nelson's contribution each period: \(26 \times \$200 = \$5200\). So Nelson contributes \$5200 to his 401(k) annually.
02

Calculate Maximum Employer Contribution

We know that the employer will match 40% of Nelson鈥檚 contributions up to 7% of his annual salary. Therefore we need to calculate 7% of Nelson鈥檚 annual salary: \(\$120,000 \times 0.07 = \$8,400\). This is the maximum amount that the employer could potentially contribute.
03

Calculate Actual Employer Contribution

However, the employer only matches 40% of Nelson's actual contribution, so we need to calculate 40% of Nelson's annual contribution of \$5200: \(0.4 \times \$5200 = \$2080\). Therefore, even though the employer could contribute up to \$8400, they will only contribute \$2080.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Employer Matching Contribution
The concept of an employer matching contribution is a wonderful benefit offered by many employers to help their employees save for retirement. Essentially, when you, as the employee, contribute to a 401(k) plan, your employer offers to "match" a certain portion of your contributions, thereby increasing the total savings in your retirement fund.
The match can vary from company to company. In Nelson's case, his employer offers to match 40% of his contributions. But here鈥檚 the catch 鈥� this is only applicable up to a certain percentage of Nelson鈥檚 annual salary.
In the given scenario, they will match contributions up to 7% of his annual salary. This means, no matter how much he manages to contribute, the employer will only match up to the limit set at 7%. So, essentially, it is a win-win situation if Nelson contributes maximally to get the full benefit of his employer's match.
Employee Contributions
Employee contributions are the portions of an employee's salary that they choose to set aside for their 401(k) plan.
In Nelson's situation, he contributes $200 every two weeks to his 401(k). With 52 weeks in a year, he makes 26 such biweekly contributions annually. When you multiply 26 by $200, you find out that Nelson contributes a total of $5200 each year.
These contributions are important because, the more Nelson contributes, the more his employer can also contribute through matching, up to their specified limit. The contributions can also be influenced by how much deductables you can afford from your salary, determining your eventual retirement savings.
Annual Salary
Nelson's annual salary is a critical component in determining the maximum possible contributions both from him and his employer.
Nelson earns $120,000 per year and this figure is used to calculate the limits on both his and his employer's contributions. According to the plan rules laid out in the exercise, Nelson can contribute up to 15% of his annual salary to his 401(k) each year. This means he can potentially contribute up to $18,000 annually.
Similarly, his employer's matching contributions are capped at 7% of his annual salary, which equates to $8400. This helps ensure that the employer's liability is capped, while still offering employees like Nelson a robust opportunity to build their retirement savings.

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Most popular questions from this chapter

New City Insurance Company offers a term life insurance policy with a renewable annual premium. The first year premium is \(\$ 140\) . Premiums increase 6\(\%\) each year. a. What will the premium be in the second year? b. What will the premium be in the third year? c. What will the premium be in the fifth year? d. What will premium be in the xth year?

Laura has been contributing to a retirement account that pays 4\(\%\) interest with pretax dollars. This account compounds interest monthly. She has put \(\$ 500\) per month into the account. At the end of 10 years, she needed to pay some medical bills and had to withdraw 15\(\%\) of the money that was in the account. a. Rounded to the nearest dollar, how much did she withdraw? b. Laura pays 23\(\%\) of her income in taxes. What was her tax on the amount of the withdrawal (rounded to the nearest dollar)? c. She had to pay a 10\(\%\) early withdrawal penalty. How much was she required to pay, rounded to the nearest dollar?

Office Industries uses a final average formula to calculate employees鈥� pension benefits. The calculations use the salary average of the final four years of employment. The retiree will receive an annual benefit that is equivalent to 1.4% of the final average for each year of employment. Charlotte and Krista are both retiring at the end of this year. Calculate their annual retirement pensions. a. Krista鈥檚 years of employment: 18 Final four annual salaries: \(\$ 72,000, \$ 74,780, \$ 74,780, \$ 76,000\) b. Charlotte's years of employment: 23 Final four annual salaries: \(\$ 81,000, \$ 81,000, \$ 81,400, \$ 81,900\)

Ricky is 35 years old. He plans to retire when he is \(63 .\) He has opened a retirement account that pays 3.2\(\%\) interest compounded monthly. If he makes monthly deposits of \(\$ 400\) , how much will he have in the account by the time he retires?

Sunshine Living calculates its pension benefits as follows: Years of service 脳 2.25% multiplier 脳 Average of last five annual salaries. What is Killian鈥檚 annual pension benefit if he worked for Sunshine Living for 16 years and his last annual salaries were \(\$ 38,600,\) \(\$ 39,990, \$ 41,000, \$ 41,500,\) and \(\$ 55,200 ?\)
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