Kim (50 Years of Age) Is Considering Whether to Participate

question 54

Essay

Kim (50 years of age) is considering whether to participate in her company's Roth 401(k) or traditional 401(k). This year, she plans to invest either $4,000 in a Roth 401(k) or $5,000 in a traditional 401(k). Kim plans on leaving the contribution in the retirement account for 20 years when she will receive a distribution of the entire balance in the account. Her employer does not have a matching program for employee contributions to retirement accounts. Assume Kim can earn a 6 percent before tax return in either account and that she anticipates that in 20 years her tax rate will be 30%.
1) What would be Kim's after-tax accumulation in 20 years if she contributes $4,000 to a Roth 401(k) account? 2) What would be her after-tax accumulation in 20 years if she contributes $5,000 to a traditional 401(k) account?

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Definitions:

Paid-in Capital

Paid-in capital is the amount of money that a company has received from shareholders in exchange for shares of stock, reflecting the capital that has been invested in the company beyond its par value.

Common Stock Subscribed

A commitment by investors to purchase shares of a company's common stock, where the shares are reserved for the subscribers until payment is made.

Dividends in Arrears

Dividends on preferred shares that have not been paid in the scheduled time, accruing until they are paid out.