401(k) Calculator

A 401(k) is a form of retirement savings plan in the U.S. with tax benefits that are mainly available through an employer. It is named after subsection 401(k) in the Internal Revenue Code, which was made possible by the Revenue Act of 1978. Self-directed 401(k)s exist for people who can’t participate in employer-sponsored 401(k)s. Contributions to a 401(k) are made as pre-tax deductions during payroll, and the dividends, interest, and capital gains of the 401(k) all benefit from tax deferment. This means that assets in a 401(k) grow tax-free and won’t be taxed until a later point, usually during retirement.

Employees, sometimes called plan participants, can contribute a certain percentage of their pre-tax salaries to their 401(k) plans. However, in addition to the annual limit set by the IRS, it is possible for employers to set limits on the percentage of their paychecks that employees can contribute. In addition, as part of a 401(k) plan, employers can choose to match employee contributions, usually up to a certain percentage of the employee’s paycheck. The IRS contribution limit increases along with the general cost-of-living increase due to inflation. The 2024 deferral limit for 401(k) plans was $23,000, the 2025 limit is $23,500.

General Pros and Cons of a 401(k)

Pros

• Tax-deferred growth – Similar to traditional IRAs or deferred annuities, growth of investments with a 401(k) are tax-deferred, giving these retirement plans an advantage over other methods.
• Employer matching – 401(k)s are known for often including an employer matching program, essentially providing “free money” for your retirement.
• Tax-deductible contributions – Contributions reduce taxable income, lowering total taxes owed.
• High contribution limits – 401(k)s have relatively high annual contribution limits compared to other retirement accounts.
• Creditor protection – 401(k) funds are generally protected from bankruptcy proceedings.

Cons

• Limited investment options – 401(k)s typically offer fewer investment choices compared to other investment accounts.
• Higher fees – Plan administration costs can result in higher fees compared to other retirement savings options.
• Reduced liquidity – Funds cannot typically be withdrawn without penalty before age 59½.
• Vesting periods – Employer contributions may not fully belong to you until after a set period of time.
• Waiting periods – Some employers require a waiting period before employees can participate in the 401(k) plan.

Employer Match

A 401(k) match is an employer’s percentage match of a participating employee’s contribution to their 401(k) plan, usually up to a certain limit denoted as a percentage of the employee’s salary. There can be no match without an employee contribution, and not all 401(k)s offer employer matching.

As an example, an employer that matches 50% of an employee’s contribution for up to 6% of their salary would contribute a maximum of 3% of the employee’s salary to the employee’s 401(k). Another common matching scheme is a dollar-for-dollar employer match, up to a certain percentage of salary.

Taking full advantage of an employer’s match by contributing to a 401(k) can make even more financial sense than the opportunity cost of many other things, such as paying off high-interest debt. To illustrate, a 401(k) that matches 100% of contributions up to a certain amount generates an immediate 100% return on investment for the contributor, which is pretty hard to beat!

Early Withdrawal

Contributions and their subsequent interest earnings as part of a 401(k) plan cannot be withdrawn without penalty before the age of 59½. In some cases, exceptions are made, and early withdrawals are permitted. Under these circumstances, early 401(k) withdrawals are still subject to ordinary income taxes, but not the 10% penalty.

Some 401(k) plans allow for withdrawals if there is proof of hardship. In order to qualify, a person must submit substantial proof of hardship to administrators who will decide whether or not to grant a withdrawal. A hardship withdrawal cannot be returned to an account once a disbursement is made. Not all employers or plan administrators offer hardship withdrawals.

Required Minimum Distributions

Anyone that reaches age 73 (72 if you reach age 72 before Dec. 31, 2022) is required to take distributions from their 401(k). This is called a required minimum distribution (RMD). The exact date at which RMDs are required is April 1st of the year after a retiree reaches the age of 73. In order to determine the exact amount, retirees can take their 401(k) retirement assets and divide it by a life-expectancy factor, which changes slightly every year.

The federal penalty for not taking the RMD is a 50% tax on any amount not withdrawn in time. The amount of the required distribution is based on the prior year’s December 31st account balance and an IRS life expectancy chart.