Question - Slaphappy Stuffenberger, 56 years old, works as a fast-order cook in a greasy diner that even the town dog steers clear of. Slaphappy has an annual salary of $32,000 because he has a college degree and is almost as educated as the busboy, who has a doctorate degree in applied physics.
Slaphappy's employer recently set up a 401(k) plan. He may defer up to 10% of his gross salary each year, and his employer will make matching contributions up to 6% per year. This year, Slaphappy agreed to the full 10% salary reduction. Slaphappy also has a small IRA balance of $2.4 million tied up in money market accounts and some Ebay stock he purchased back in 1997.
1. What is the total contribution amount for Slaphappy and his employer? How do you know?
2. What amount of compensation will Slaphappy have to pay tax on this year? What is the formula?