What amount of deferred compensation would accomplish this objective? 

 

1) In 2014, Nitai contributes 10 percent of his $119,000 annual salary to a Roth 401(k) account sponsored by his employer, AY Inc. AY Inc. matches employee contributions dollar for dollar up to 10 percent of the employee’s salary to the employee’s traditional 401(k) account. Nitai expects to earn a 5 percent before-tax rate of return.  Assuming he leaves his contributions in the Roth 401(k) and traditional 401(k) accounts until he retires in 25 years, what are Nitai’s after-tax proceeds from the Roth 401(k) and traditional 401(k) accounts after he receives the distributions assuming his marginal tax rate at retirement is 30 percent? (Do not round intermediate calculations. Round “Future value factor” to 4 decimal places. Round your answers to the nearest dollar amount.)   2)XYZ Corporation has a deferred compensation plan under which it allows certain employees to defer up to 25 percent of their salary for five years. (for purposes of this problem, ignore payroll taxes in your computation) (Round your intermediate calculations and final answers to the nearest whole dollar amount.)                a. Assume XYZ has a marginal tax rate of 35 percent for the foreseeable future and earns an after-tax rate of return of 12 percent on its assets. Joel Johnson, XYZ’s VP of finance, is attempting to determine what amount of deferred compensation XYZ should be willing to pay in five years that would make XYZ indifferent between paying the current salary of $19,900 and paying the deferred compensation. What amount of deferred compensation would accomplish this objective?  b. Assume Julie, an XYZ employee, has the option of participating in XYZ’s deferred compensation plan. Julie’s marginal tax rate is 40 percent and she expects the rate to remain constant over the next five years. Julie is trying to decide how much deferred compensation she will need to receive from XYZ in five years to make her indifferent between receiving the current salary of $19,900 and receiving the deferred compensation payment. If Julie takes the salary, she will invest it in a taxable corporate bond paying interest at 9 percent annually (after taxes). What amount of deferred compensation would accomplish this objective?  3)Yuki (age 45 at year-end) has been contributing to a traditional IRA for years (all deductible contributions), and her IRA is now worth $42,000. She is trying to decide whether she should roll over her traditional IRA into a Roth IRA. Her current marginal tax rate is 25 percent. She plans to withdraw the entire balance of the account in 20 years and she expects to earn a before-tax rate of return of 5.2 percent on her retirement accounts and a 4.2 percent after-tax rate of return on all investments outside of her retirement accounts. For each of the following alternative scenarios, indicate how much more or less Yuki will accumulate after taxes in 20 years if she rolls over her traditional IRA into a Roth IRA. Be sure to include the opportunity cost of having to pay taxes on the rollover. (Round “Future value factor” to 4 decimal places. Round final answers to the nearest whole dollar amount.)  a. When she withdraws the retirement funds in 20 years, she expects her marginal tax rate to be 35 percent.  Accumulationi f shekeeps funds in traditional IRA  Accumulation if she roll funds into roth IRA  Accumulation is she rolls over traditional into roth IRA  When she withdraws the retirement funds in 20 years, she expects her marginal tax rate to be 20 percent. Accumulationi f shekeeps funds in traditional IRA  Accumulation if she roll funds into roth IRA  Accumulation is she rolls over traditional into roth IRA

 

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