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401(k) Calculator

A 401(k) is an employer-sponsored retirement plan that lets you defer taxes until you're retired. In addition, many employers will match a portion of your contributions, so participation in your employer's 401(k) is like giving yourself a raise and a tax break at the same time.

This first calculator shows how your balance grows during your working years:

 

Inputs
Current 401(k) Balance: $
Your Annual Contribution: $
Employer's Matching Contribution: $
Years to Retirement:  
Investment Return Rate:   %
 
Results
Balance at Retirement: $

 

During retirement, you pay income tax on the money you withdraw each year:

 

Inputs
Balance at Retirement: $
Investment Return Rate:   %
Years to Pay Out:  
Income Tax Rate:   %
 
Results
Annual Payout Amount: $
  Minus Taxes: $
Annual Post-Tax Amount: $

 

401(k) Tax Advantage

The tax advantage of the 401(k) is similar to that of a deductible IRA - it's not so much that you get to defer taxes, as that you pay less taxes, period. Unlike a regularly-taxed account, the 401(k) lets you get taxed just once, rather than multiple times.

Regularly-Taxed Account 401(k)
You pay income tax, and then make your contribution with post-tax dollars

Your principal may be subject to taxes on dividends and capital gains as it grows

You pay capital gains tax on your gain at withdrawal

You get a tax deduction, essentially letting you deposit pre-tax dollars

Your principal grows tax-free
 

You pay income tax on the entire amount of your withdrawal


 

Roth vs. Regular

A Roth 401(k) gives you a similar "tax me once" advantage, except that you get taxed at the beginning rather than the end. See the Roth IRA article for more.

 

For More Information

This IRS document gives a brief overview with links to other documents on their site.

The Bogleheads have prepared this article covering 401(k)'s in detail.

If you're an employee, your best source of information is from your employer, who can explain the choices available under your plan.

If you're an employer planning to start a 401(k) for your employees, consider a provider of low fee index funds.

 

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