1) She can participate in 401K plan that the company offers as part of the employee benefit package. She can afford to contribute $5,000 each year to her 401K plan. Her investment plan earns 10% a year. She estimates her plan balance will be $57,269 keeping in mind that she will contribute 5000 each year at 10 percent.
2) She can save $3,600 each year if she takes her entire salary in cash, pay income tax. Susan won't contribute to her 401k plan for 8 years but she has an investment plan that earns 10 % a year. She estimates that her saving funds in 8 years will be $37,304 because her annual income is taxable, her saving account will mature at 7.2%.
Please show the calculations for each of the option and explain which of these two options have the greatest after-tax cash to start a business (Susan has a constant 28% tax rate)
See attached Excel file.
Susan has an advantage in using the 401(k) plan which the problem does not even address. That is, she invests $5,000 per year but receives a tax ...
Given a taxpayer's option to invest in a tax-advantaged or taxable account, this solution illustrates how to compute the financial advantage of the former over the latter.