401K Calculator

1. What is a 401(k) plan?

A 401(k) is an employer-sponsored retirement savings plan that allows employees to contribute a portion of their salary on a pre-tax basis. Contributions grow tax-deferred until withdrawn in retirement.

2. How does a 401(k) plan work?

Employees choose to defer a portion of their salary into the plan, which can then be invested in various options such as stocks, bonds, and mutual funds. Contributions and any earnings grow tax-deferred until withdrawal.

3. What are the contribution limits for a 401(k)?

For 2024, the contribution limit is $22,500 for employees under 50. Employees aged 50 and older can make an additional catch-up contribution of $7,500, bringing their total to $30,000.

4. What is an employer match?

An employer match is when an employer contributes additional money to an employee’s 401(k) account, usually based on the employee’s own contributions, up to a certain percentage of the employee’s salary.

5. What are the tax benefits of a 401(k)?

Contributions to a traditional 401(k) are made with pre-tax dollars, reducing your taxable income for the year. The investments grow tax-deferred, and you only pay taxes upon withdrawal in retirement. Roth 401(k) contributions are made with after-tax dollars, but withdrawals in retirement are tax-free.

6. When can I withdraw money from my 401(k) without penalties?

You can withdraw money from your 401(k) without penalties after reaching age 59½. Withdrawals before this age may be subject to a 10% early withdrawal penalty and income taxes unless an exception applies.

7. What are required minimum distributions (RMDs)?

RMDs are mandatory withdrawals that must start at age 73 (as of 2024). The IRS determines the minimum amount that must be withdrawn each year to ensure that taxes are paid on the deferred savings.

8. Can I take a loan from my 401(k)?

Many 401(k) plans allow loans, but the rules vary by employer. Typically, you can borrow up to 50% of your vested account balance, with a maximum loan amount of $50,000. Loans must be repaid with interest, usually within five years.

9. What happens to my 401(k) if I change jobs?

You have several options:

• Leave the money in your former employer’s plan (if allowed).
• Roll it over to your new employer’s plan.
• Roll it over to an IRA.
• Cash out the account (not recommended due to taxes and penalties).

10. What is the difference between a traditional 401(k) and a Roth 401(k)?

• Traditional 401(k): Contributions are pre-tax, and withdrawals are taxed as ordinary income.
• Roth 401(k): Contributions are made with after-tax dollars, and qualified withdrawals in retirement are tax-free.

11. How should I choose my 401(k) investments?

Diversify your investments based on your risk tolerance, time horizon, and retirement goals. Many plans offer target-date funds, which automatically adjust the investment mix as you approach retirement age.

12. Can I contribute to both a 401(k) and an IRA?

Yes, you can contribute to both, but there are annual contribution limits and income restrictions that may affect your ability to deduct IRA contributions if you also participate in a 401(k).

13. What are vesting schedules?

Vesting schedules determine when you have full ownership of employer contributions to your 401(k). Your own contributions are always 100% vested, but employer contributions may vest over a period of time.

14. Can I still contribute to my 401(k) if I am self-employed?

Self-employed individuals can contribute to a Solo 401(k), which offers similar benefits to a traditional 401(k), including high contribution limits and tax advantages.

15. What is automatic enrollment in a 401(k) plan?

Automatic enrollment is a feature where employees are automatically enrolled in the 401(k) plan at a default contribution rate unless they opt out or choose a different contribution level.