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Tax benefits through 401(K) Plan

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Your friend, Sal, wants to know how much he would save in taxes by contributing to his 401(k) plan. He can invest up to 10% of his income into the plan. His current income is US$50,000 per year, and he is in the 25% tax bracket.

In a memo to your friend that outlines how much he would save in taxes by contributing to his 401(k) plan. Include an Excel spreadsheet that provides answers for each of the following investment choices: 2%, 4%, 6%, 8%, and 10%. Additionally, provide Sal with other suggestions to minimize his taxes.

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Solution Summary

Solution describes the tax benefits through contributions in 401(K) Plans. Illustration is made for given various contributions.

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Solution:

A 401(k) is an employer-sponsored qualified retirement savings plan. It is a saving for retirement. 401(k) plan helps you start regular investing, and stick with it. Your contributions are automatically deducted from your salary before you receive your check.
Since the money is deducted from your gross income, you will have a lower taxable income, which means you will pay less in ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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