Module 6c: Defined Contribution
Lisa works for an employoer who has a 401(k) plan. This type of plan is the most well-known
of all "defined-contribution" plans. The amount that an employee contributes each year is
not subject to income tax, and earnings on the contributions grow tax-deferred until the
employee retires and begins withdrawing from the account. When employees retire, the amount they
withdraw is subject to income tax. Plans have regulations on eligibility and withdrawls.
Many employers "match" the contribution of an employee up to some limit.
- If Lisa earns $25,000, can contribute up to 10% of her salary, and the employer matches
50 cents for each dollar up to 6% of her salary, what amount will be contributed by the
employer if Lisa contributes a corresponding amount?
- What amount must Lisa contribute to receive the employer's "match"?
- What additional amount could Lisa set aside? (Note: It will not be matched by the employer, but
earnings will grow tax-deferred until retirement.)
- 0.06 * $25,000 * 0.5 = $750
- 0.06 * $25,000 = $1,500
- 0.04 * $25,000 = $1,000
Module 6 - Module 6a | Module 6b | Module 6c | Module 6d | Module 6e