401(k) Calculator

A 401(k) represents one of the most powerful wealth-building tools available to American workers, combining tax advantages, employer matching contributions, high contribution limits, and automatic payroll deductions that enforce consistent saving. Understanding how 401(k) plans work, the difference between traditional and Roth options, employer match maximization, vesting schedules, and investment selection helps you leverage this retirement vehicle effectively to build substantial long-term wealth.

Traditional vs Roth 401(k)

Traditional 401(k) contributions reduce your current taxable income, providing immediate tax savings but creating taxable withdrawals in retirement. If you're in the 24 percent tax bracket and contribute $10,000, you save $2,400 in current taxes but will pay taxes on both contributions and growth when withdrawing in retirement. This works well if you expect to be in a lower tax bracket in retirement than during your working years.

Roth 401(k) contributions use after-tax dollars, providing no current tax deduction but creating tax-free withdrawals in retirement including all growth. That same $10,000 Roth contribution costs you the full $10,000 in current taxes but will never be taxed again, even if it grows to $50,000 by retirement. This benefits people expecting to be in similar or higher tax brackets in retirement or who want to hedge against future tax rate increases.

Many financial advisors recommend Roth contributions for young workers in low tax brackets who have decades for tax-free growth to compound. If you're in the 12 or 22 percent bracket, paying taxes now and locking in tax-free growth for 30 to 40 years often beats the alternative of deferring taxes then paying potentially higher rates on a much larger balance in retirement.

Splitting contributions between traditional and Roth 401(k)s provides tax diversification, creating flexibility in retirement to manage taxes and required minimum distributions. You can optimize tax efficiency by withdrawing from traditional accounts in low-income years and Roth accounts in high-income years, or mixing both to stay below tax bracket thresholds and Medicare premium surcharge levels.

Loans and Hardship Withdrawals

Many 401(k) plans allow loans up to 50 percent of your vested balance or $50,000, whichever is less, repaid with interest to your own account over 5 years (longer for primary residence purchases). While you pay yourself interest, you're borrowing from your retirement, missing market growth on borrowed amounts, and must repay with after-tax dollars that will be taxed again when withdrawn in retirement.

Defaulting on a 401(k) loan—typically by leaving your job before repaying—converts the outstanding balance to a taxable distribution plus a 10 percent early withdrawal penalty if you're under 59.5 years old. A $30,000 loan default costs you approximately $11,400 in taxes and penalties (assuming 24 percent tax bracket) plus you've permanently removed $30,000 from your retirement savings and its future growth potential.

Hardship withdrawals for specific qualifying emergencies (medical expenses, preventing eviction or foreclosure, burial expenses, primary residence purchase) allow accessing money without repaying, but trigger immediate taxes and 10 percent penalty for those under 59.5. The permanent reduction in retirement savings and tax consequences make hardship withdrawals extremely costly, justified only for genuine emergencies without alternatives.

Avoid 401(k) loans and withdrawals if at all possible by maintaining adequate emergency savings outside retirement accounts. These accounts are designed for retirement with tax structures incentivizing leaving money untouched until age 59.5. Tapping retirement savings for non-emergencies or borrowing against them rarely makes financial sense when the long-term costs are calculated.

Employer Match and Free Money

Employer matching contributions represent the most valuable 401(k) feature, providing immediate 50 to 100 percent returns on your contributions up to specified limits. A typical match formula offers 50 percent of employee contributions up to 6 percent of salary. If you earn $80,000 and contribute 6 percent ($4,800), your employer adds 50 percent of that amount ($2,400), bringing total contributions to $7,200 annually.

Never leave employer match on the table—it's free money that represents guaranteed returns you can't replicate elsewhere. The minimum you should contribute to any 401(k) is whatever captures the full employer match. Even if you have high-interest debt, contributing enough to capture the full match usually makes sense because the immediate 50 to 100 percent return exceeds interest costs on most consumer debt.

Match formulas vary significantly between employers. Some provide dollar-for-dollar matches up to 3 or 4 percent of salary, while others use tiered structures like 100 percent on the first 3 percent plus 50 percent on the next 2 percent. Review your plan documents to understand exactly how your employer match works and how much you need to contribute to maximize it.

Some employers contribute to your 401(k) regardless of whether you contribute (non-elective contributions), though these are less common than match programs. Profit-sharing contributions based on company performance provide additional employer funding, often allocated as year-end bonuses. These contributions help build retirement savings beyond your personal contributions and employer match.

Vesting Schedules and Job Changes

Vesting determines what portion of employer contributions you get to keep when leaving the company. Your personal contributions are always 100 percent vested immediately—they're your money regardless of how long you work there. Employer contributions often follow vesting schedules ranging from immediate to graded or cliff vesting over 2 to 6 years.

Cliff vesting means zero employer contributions vest until you reach a specified service period, then 100 percent vest at once. A 3-year cliff means if you leave after 2 years and 11 months, you get none of the employer contributions. Reaching 3 years vests you fully in all past and future employer contributions. This structure incentivizes employees to stay past the cliff date.

Graded vesting provides partial vesting over time, such as 20 percent per year over 5 years or 33 percent per year over 3 years. With 20 percent annual grading, leaving after 3 years means you keep 60 percent of employer contributions, forfeiting the remaining 40 percent. This structure rewards longevity while providing some benefit even to shorter-tenure employees.

Consider vesting schedules when timing job changes if you're close to a vesting milestone. Leaving 6 months before a 3-year cliff vests might cost you thousands in forfeited employer contributions. If possible, time departures to occur after vesting milestones to maximize wealth accumulation, though better job opportunities sometimes justify leaving unvested money behind.

Rollover Options When Changing Jobs

Leaving an employer presents four options for your 401(k): leave it with the former employer, roll it into your new employer's plan, roll it into an IRA, or cash it out. Cashing out destroys your retirement savings through taxes and penalties—avoid this option except in dire financial emergencies that justify the devastating long-term cost.

Rolling into an IRA provides maximum control and investment options beyond the limited selections in 401(k) plans. IRA rollovers face no taxes or penalties if completed properly as direct trustee-to-trustee transfers. You can then invest in virtually any stocks, bonds, ETFs, or mutual funds rather than being limited to your former employer's plan options. This flexibility often makes IRA rollovers the best choice for former employer 401(k) balances.

Rolling into your new employer's plan consolidates retirement accounts in one place, simplifying management and potentially providing access to better investment options or lower fees than IRAs, especially with large companies negotiating institutional pricing. This option works well if your new employer's plan is high-quality with low fees and good investment selections.

Leaving money with former employers becomes unwieldy as you change jobs multiple times throughout your career, potentially creating a dozen small retirement accounts scattered across previous employers. Consolidation through IRA rollovers or rolling into your current employer's plan simplifies management, ensures you don't lose track of accounts, and makes strategic allocation across your total portfolio easier.

Contribution Limits and Maximization

The 2024 employee contribution limit is $23,000 for workers under 50, with an additional $7,500 catch-up contribution allowed for those 50 and older, totaling $30,500. Combined employee and employer contributions can't exceed $69,000 ($76,500 including catch-up contributions) or 100 percent of compensation, whichever is less. These high limits allow aggressive savers to build substantial retirement balances.

Maximizing 401(k) contributions provides enormous long-term benefits through tax savings and compound growth. Contributing the maximum $23,000 annually from age 30 to 65 at 7 percent average returns accumulates approximately $2.6 million. Starting at 40 and maxing out contributions yields roughly $1.1 million—a $1.5 million difference from the ten-year delayed start, illustrating the critical importance of early aggressive saving.

Increase your contribution percentage annually, ideally when you receive raises so you don't feel the impact on take-home pay. If you contribute 6 percent and get a 3 percent raise, increase your contribution to 8 percent—you'll still see a slight take-home increase while dramatically improving retirement savings. Many plans offer automatic annual increases that implement this strategy without requiring you to remember.

Take advantage of catch-up contributions once you turn 50, especially if you didn't save aggressively earlier in your career. The extra $7,500 annually for 15 years until 65 at 7 percent returns adds approximately $297,000 to your retirement balance—substantial catching up that helps compensate for earlier undersaving.

Investment Selection and Asset Allocation

Most 401(k) plans offer 10 to 30 investment options including target-date funds, index funds, actively managed mutual funds, and sometimes company stock. Choose investments aligned with your age, risk tolerance, and retirement timeline. Younger workers generally benefit from aggressive stock allocations (80 to 100 percent), while those nearing retirement should shift toward more conservative mixes with bonds and stable value funds.

Target-date funds automatically adjust asset allocation based on your expected retirement date, becoming more conservative as you age. A 2055 target-date fund for someone planning to retire around 2055 might hold 90 percent stocks now, automatically shifting to 60 percent stocks by 2045 and 40 percent by 2055. These funds provide hands-off diversification ideal for investors who don't want to manage allocations actively.

Low-cost index funds tracking the S&P 500, total stock market, and total bond market typically outperform actively managed funds over long periods while charging significantly lower fees. Expense ratios matter enormously over decades—a 1 percent fee difference costs you approximately 25 percent of your final balance over 40 years. Prioritize low-cost index funds whenever available in your plan.

Avoid overconcentration in company stock, even if your employer offers matching contributions in stock or encourages employee ownership. Holding more than 5 to 10 percent of your retirement portfolio in your employer's stock creates dangerous concentration risk—you're already dependent on the company for your paycheck; don't also risk your retirement on their stock performance. Enron employees learned this lesson devastatingly, losing both jobs and retirement savings simultaneously.