How Much Your 401(k) Grows If You Stop Contributing

It can be satisfying to watch your 401(k) plan balance grow over time as you contribute to it. But what happens when those contributions stop? How much you account continues to grow depends on how much money you have in it and how the market performs. Here is how you can estimate the future performance of your 401(k).

If you’d like personalized advice about planning for retirement, consider working with a financial advisor.

What Is a 401(k)?

A 401(k) is an employer-sponsored retirement account that offers tax benefits. A traditional 401(k) will be withdrawn from your paycheck pretax and will only be taxed when you withdraw from it in retirement. A Roth 401(k) is similar but reversed, in that the money that goes into it is already taxed, so it won’t be taxed when you withdraw from it in retirement. You can withdraw from either type of 401(k) penalty-free beginning at age 59 ½.

The plan will offer you investment options when you complete the paperwork. Once you deposit money, it will be invested according to your selections.

401(k) plans were specifically created to incentivize workers to save for retirement. If you contribute to a traditional 401(k), your taxable income is reduced due to the 401(k) withholdings. If you’re contributing 6% of your income to a 401(k), you won’t owe taxes on that percentage of your income. With a Roth 401(k), instead of saving on taxes in the year you contribute money to your 401(k), you’ll enjoy the savings when you withdraw it in retirement.

How Does a 401(k) Work?

You may be asking yourself, how does a 401(k) plan make money? The main way you will see your 401(k) grow is from your contributions (and your employer’s, if they offer a match). Once you stop contributing, what happens next?

So, remember the investment options you were given when you signed up for the plan? ou direct your 401(k) provider to allocate the money in your 401(k). A common investment option is a target-date mutual fund. This type of fund will contain a mixture of investments, including stocks and bonds, managed to maximize returns while minimizing your risk as you near retirement age. Generally, you’ll be advised to invest in riskier funds when you’re younger and move towards more stable investments as you age.

Your retirement withdrawals will depend on contributions, investment returns and interest.

How Does It Grow When You Stop Contributing to It?

When you stop contributing to your 401(k) plan, don’t expect to see your balance grow at the same rate. But how much your balance will grow will depend on a few factors.

Interest is one of the big factors in the continuing growth of your 401(k) plan’s balance. When you select a fund to invest in, that fund may include CDs, bonds and/or money market funds, all investments that generate interest. And the larger your balance, the larger those interest payments will be. Simply put, 5% of $100,000 is more than 5% of 10,000.

Other investments might generate earnings based on the market, such as stocks and ETFs. You may see greater volatility in these investments, with earnings either being very good or very bad. When you choose what to invest in, you set your risk profile, riskier investments have the promise of a higher payout but also can suffer markedly when the market turns.

One of the most important things to consider when thinking about how much your 401(k) balance will grow once you stop contributing is compounded growth. When you earn money, either from interest or earnings, that amount is put back into your 401(k) and invested. For a very simple example, let’s say you have $1,000. If it earns $100, your 401(k) will add that interest to the pot and invest $1,100 the following year.

According to the 2022 Survey of Consumer Finances, the median retirement account balance for individuals aged 65 to 74 was $200,000. With no further contributions and a steady 7.6% return, the balance could grow to $865,500 over 20 years. This example does not factor in any withdrawals a person might make during that time. Instead, it simply demonstrates how compound growth can continue even when new contributions stop.

On a small scale like that, it might not seem impressive. But compounding interest and earnings are the most meaningful way that a 401(k) plan will continue to generate growth after you stop contributing. If you add a couple zeroes to the end of those example figures, you’ll soon see the point.

How Is a 401(k) Taxed?

A traditional 401(k) offers tax-deferred growth, meaning you don’t pay taxes on contributions or investment earnings as they accumulate. Instead, taxes are postponed until you withdraw the money in retirement. This allows your investments to compound more efficiently over time, since the full balance remains invested.

When you take distributions from a traditional 401(k), those withdrawals are generally taxed as ordinary income. The amount you owe depends on your tax bracket at the time of withdrawal. Because of this, many investors aim to withdraw funds during retirement when their income, and potentially their tax rate, may be lower.

If you withdraw money from a 401(k) before age 59½, you may face a 10% early withdrawal penalty in addition to regular income taxes. There are some exceptions, such as certain hardship withdrawals or qualifying life events, but these rules are strict. Understanding these penalties can help you avoid unexpected costs.

Use our income tax calculator to see how taking money from your retirement accounts may impact what you owe.

A Roth 401(k) is taxed differently from a traditional account. Contributions are made with after-tax dollars, but qualified withdrawals in retirement are tax-free. This can be beneficial if you expect to be in a higher tax bracket later, offering tax diversification within your retirement strategy.

What Is the Average 401(k) Return?

The annual growth of a 401(k) depends largely on market performance and the account’s asset mix. Historically, a balanced portfolio of 60% stocks and 40% bonds has returned an average of about 7.6% annually after inflation over the long term, according to Vanguard ¹ . For accounts heavily weighted in stocks, average annual returns may trend higher, closer to 10% before inflation, based on historical S&P 500 performance.

However, actual growth can vary widely year to year. The typical 401(k) participant had a balance of $134,128 by the end of 2023, according to Vanguard’s “How America Saves 2024” ² report. That figure reflects a gain of about 19% compared to 2022, when the average account held $112,572. Over the five-year period ending in December 2023, participants experienced an average annual return of 9.7%.

Bottom Line

Your 401(k) may keep growing after contributions stop. That growth depends on market performance, your balance, and other factors. The growth can vary over time as any one of those things changes. In order to get a good idea of what yours could look like you may need to work directly with a professional financial advisor to help you calculate the estimation for your account.

Retirement Tips

• Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• Use SmartAsset’s free retirement calculator to see if you’re on track to meet your retirement goals.
• You may find your company’s 401(k) plan may not be the best option for you. And you may get better investment choices and tax breaks if you open an IRA or a Roth IRA. To help you decide, we published articles on where to open an IRA or Roth IRA.

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