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Note: When reaching the age of 70½ the IRS requires that you begin taking Required Minimum Distributions (RMDs) from this type of retirement savings account whether or not you continue to work.
  • About This Answer

    Utilizing a 401(k) is a great way to jump-start your savings. The value of your 401(k) at retirement is a function of how much you contribute, the matching provided by your employer and the appreciation of your 401(k) assets. To calculate your 401(k) at retirement we look at both your existing 401(k) balance and your anticipated future contributions, and then apply a rate of return to estimate how your retirement account will grow over time. Your current and future contributions are a function of how much you are saving and any employer matching available. These contributions are made pre-tax and the investments grow tax-deferred. Our models take into account the maximum allowable contributions. At retirement we calculate the taxes paid on the money you withdraw from your 401(k) and any prepayment penalties that may occur if you decide to retire early.

    ...read more
  • Our Assumptions

    Eligibility: Your employer needs to offer a 401(k) plan.

    Maximum contribution: We use the current maximum contributions and assume these numbers will grow with inflation over time.

    Catch-up contribution: We account for the fact that those age 50 or over can make catch-up contributions. We use the current total catch-up contribution (not including employer matching) limit and assume it grows with inflation over time.

    Special catch-ups: We also take into account the special catch-up options for employees with 403(b) plans who have been with their company for 15 years or more, and the special catch-up options available to those with 457(b) plans in the last three years before retirement.

    Early withdrawal penalty: We account for the fact that early withdrawals are subject to a 10% additional tax.

    Rollovers: We assume transfers and rollovers to eligible plans or IRAs are permitted.

    Taxes: Contributions to a 401(k) are made pre-tax, investments grow tax-deferred and income taxes are paid on withdrawal at the tax rate applicable at the time of withdrawal. To better align with filing season, tax calculations are based on the tax filing calendar, therefore calculations prior to April are based on the previous years tax rules.

    ...read more
How a Works
  • A is a retirement savings account that allows you to defer paying income taxes on contributions until your retirement.
  • Funds withdrawn from your plan before age 59 1/2 are taxed as ordinary income and you may have to pay a 10% federal tax penalty for early withdrawal.
  • The personal contribution limit for a plan in 2025 is . The catch-up contribution limit for employees over the age of 50 in 2025 is .
  • Your employer can contribute up to to your through company matching programs.
Tax Benefit of Savings
  • You will only pay taxes on your contributions and earnings when you withdraw money. Your withdrawals are taxed as income (not capital gains) but as most people are in a lower tax bracket in retirement than when in the workforce this creates a significant tax advantage. We estimate your tax rate in retirement will be % vs your current estimated tax rate of %.
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401(k) Calculator

If you’ve thought for even a few minutes about saving for retirement, chances are you have some familiarity with the 401(k) savings plan. You probably know, for example, that a 401(k) is a type of “defined contribution plan,” and they receive special tax treatment from the IRS.

For anyone who is building a retirement strategy that prominently features a 401(k), it’s important to have a deeper understanding of the plan, both its advantages and disadvantages. In what cases is it most useful? Are there hidden costs? And, most importantly, how does the dang thing work? Before we try to answer that question, however, let’s make sure we understand the basics.

Do you need help planning for your retirement? Consider finding a financial advisor who has experience building retirement plans.

How a 401(k) Plan Works

A 401(k) plan works as a powerful retirement savings vehicle offered by many employers, allowing employees to set aside pre-tax income for their future. This tax-advantaged account helps workers build their retirement nest egg while reducing their current taxable income. Contributions are automatically deducted from your paycheck before taxes are applied, allowing your savings to grow tax-deferred until retirement.

Since contributions in a 401(k) account are made pre-tax, taxable income is reduced, which may lower the individual's overall tax liability for the year. Funds placed in the account grow tax-deferred, meaning investment earnings, such as interest, dividends and capital gains, aren't taxed until the money is withdrawn, typically after retirement.

Understanding the rules around accessing your funds is crucial when participating in a 401(k) plan. If you withdraw money before reaching age 59 ½, those funds are taxed as ordinary income, and you may face an additional 10% federal tax penalty. These restrictions are designed to discourage using retirement savings for short-term needs and to keep your money invested for the long term.

One of the most valuable features of a 401(k) plan is the potential for employer matching contributions. Between you and your employer, a 401(k) can receive contributions up to $70,000 to your account through company matching programs, essentially providing you with free money toward your retirement. Common matching formulas include dollar-for-dollar matches up to a certain percentage of your salary or partial matches on a higher percentage of contributions.

The combination of tax-deferred growth, regular contributions and employer matching creates significant long-term wealth-building potential. Your 401(k) investments compound over time without being reduced by annual tax obligations, allowing your retirement savings to grow more efficiently. This compounding effect becomes increasingly powerful the earlier you begin contributing and the longer you allow your investments to grow.

Understanding a Defined Contribution Plan

Photo credit: © iStock/Marvin Samuel Tolentino Pineda

A defined contribution plan is any retirement plan to which an employee or employer regularly contributes some amount, which a 401(k) plan qualifies as. Often, the employee chooses to send a fixed percentage of her monthly income to the account, and these contributions are automatically withdrawn, directly from her paycheck - no effort required. The money that doesn't go to the employee's take-home pay gradually accumulates, the balance earns interest from investments, and by the time retirement rolls around, it’s grown into a substantial nest egg for the retiree.

One of the primary advantages of a defined contribution plan is the ability to defer income taxes on your contributions until retirement, when you may be in a lower tax bracket. This tax deferral helps your investments grow more efficiently over time. However, accessing these funds early comes with consequences. Withdrawals before age 59 ½ are subject to ordinary income tax plus a 10% federal tax penalty, making early access costly.

Most defined-contribution plans offer a range of investment options, typically including mutual funds, target-date funds and sometimes company stock. Participants are responsible for selecting their investments and managing their portfolio allocation. This provides flexibility but also requires some financial knowledge to make appropriate choices aligned with your retirement timeline and risk tolerance.

In a defined contribution plan (unlike with a defined benefit plan), there are no guarantees about the income you’ll receive in retirement. That doesn’t mean such plans can’t be just as effective, however, and employers often sweeten the deal by making contributions of their own, straight into your account.

Important 401(k) Terms to Know

Understanding the terminology associated with your 401(k) retirement plan is essential for making informed decisions about your financial future. These key terms will help you better comprehend how your 401(k) works and maximize its benefits.

  • Contribution limit: The maximum amount you can deposit into your 401(k) account each year as determined by the IRS. This cap typically updates annually, and allows for increased limits for those 55 and older.
  • Employer match: The money your employer contributes to your 401(k) based on your contributions. This is essentially free money that instantly boosts your retirement savings, often structured as a percentage match up to a certain portion of your salary.
  • Vesting schedule: The timeline that determines when you gain full ownership of employer contributions to your account. Some employers offer immediate vesting, while others require you to work for the company for a specific period before you're entitled to keep all matched funds if you leave.
  • Fund expense ratio: The annual fee charged by investment funds within your 401(k) plan, expressed as a percentage of assets. Lower expense ratios mean more of your money stays invested and working for you over time.
  • Required minimum distribution (RMD): The minimum amount you must withdraw from your 401(k) annually once you reach a certain age (73 years old as of 2025). These withdrawals are taxed as ordinary income and failure to take RMDs can result in significant tax penalties.

Familiarizing yourself with these important 401(k) terms will help you make strategic decisions about your retirement savings. By understanding the language of retirement planning, you can better communicate with financial advisors and take control of your financial future.

401(k) Rules to Know

Before investing your own money into a 401(k) plan, make sure you understand the specific rules that the accounts are bound by. For example, there are specific contribution limits that you can utilize every year to maximize your long-term savings. Likewise, your employer can only invest so much into your account as well. Here are the rules you need to know.

As previously mentioned, the IRS sets limits on how much money someone can contribute to a 401(k) over a tax year. For 2025, this contribution limit is set at $23,500 (up from $23,000 in 2024). However, if you're over the age of 50, you can also deposit up to $7,500 in catch-up contributions to your 401(k) during the 2025 tax year, which means the total limit for these savers is $31,000.

Additionally, starting in 2025, those aged 60 to 63 can make "super catch-up contributions" of 150% of the standard catch-up limit, bringing the total for these to $11,250 for 2025. So if you're 60 to 63 years old, then your total contribution limit for 2025 would be $34,750.

Once you reach age 73, you must begin taking required minimum distributions (RMDs) from traditional 401(k) accounts. These mandatory withdrawals are calculated based on your account balance and life expectancy. Failing to take RMDs results in a substantial penalty of 50% of the amount you should have withdrawn, which could really hurt at a time when some people may not have a ton of income.

Many 401(k) plans allow participants to borrow against their balance, typically up to 50% of the vested amount or $50,000, whichever is less. These loans must generally be repaid within five years with interest. However, if you leave your job with an outstanding loan, the remaining balance often becomes due immediately or is treated as a taxable distribution.

Accessing your 401(k) funds before age 59 ½ typically triggers a 10% early withdrawal penalty on top of regular income taxes. However, certain exceptions exist, including first-time home purchases, qualified education expenses and financial hardship. Understanding these 401(k) rules to know can help you avoid unnecessary penalties while planning for both retirement and potential financial emergencies.

What Impacts Your 401(k) Growth Over Time?

Photo credit: © iStock/bymuratdeniz

Many things could impact how the money in your 401(k) account grows over time, some of which are controlled by your actions, while others are beyond your ability to impact at all. For example, you can choose what types of securities you invest in, but you can’t control how the market as a whole performs on any given day. It’s important to understand what can impact your savings so that you can manage risk and maximize your ability to grow your funds.

The amount you contribute is one of the most important things you can do to maximize your long-term savings. Regular contributions form the foundation of 401(k) growth. When you consistently add money to your retirement account with each paycheck, you benefit from dollar-cost averaging, which helps smooth out market volatility effects.

Even small increases in your contribution percentage can significantly impact your long-term savings due to compounding. Taking advantage of an employer match can also give you free money to add to your account and maximize the amount you have later on. This can add thousands of extra dollars to your retirement account every year.

Your investment selections within your 401(k) play a crucial role in determining growth. Different asset classes, such as stocks, bonds and cash equivalents, can carry varying levels of risk and potential return. Generally, portfolios with higher stock allocations have historically delivered stronger long-term growth, though with greater short-term volatility. Diversifying your portfolio can also help protect against potential market downturns and maximize your funds at any time.

Speaking of market performance, it can have a large impact on how much money you may have over time in any investment account. As the market declines, so can your portfolio. However, the stock market has historically increased over time. Plus, there are opportunities to buy into the market more when there are dips to capitalize on downturns, with the hope of a rebound. Understanding how to approach these situations is key to getting through it successfully.

The amount of fees you pay in your 401(k) account or other investment accounts can impact how much they grow between the time you open that account and retirement. Even a small increase in fees can greatly impact your final savings over a decade or more. It’s important to make sure you understand any fee structures in your 401(k) plan before investing.

Finally, when and how you eventually withdraw funds impacts your effective growth rate. Taking early withdrawals not only incurs penalties but also removes money that could continue growing. Strategic withdrawal planning during retirement helps maximize the value of your accumulated savings.

Pros and Cons of Using a 401(k)

One of the most talked about benefits of a 401(k) is that the money you invest grows tax-deferred, meaning you won't pay taxes on investment gains until you withdraw funds in retirement. This allows your investments to compound more efficiently over time, potentially resulting in a significantly larger nest egg compared to taxable investment accounts.

Below are some other benefits to know:

  • Employer matching contributions: Many employers offer to match a portion of your 401(k) contributions, essentially providing free money toward your retirement. This benefit can significantly boost your retirement savings.
  • Higher contribution limits: 401(k) plans allow for substantially higher annual contributions compared to IRAs and Roth IRAs.
  • Automatic payroll deductions: Having contributions automatically deducted from your paycheck makes saving for retirement effortless and consistent. This "pay yourself first" approach ensures you're building your retirement fund before you have a chance to spend that money elsewhere.
  • Protection from creditors: 401(k) assets generally enjoy strong protection from creditors under federal law. This safeguard can preserve your retirement savings even during financial hardships or bankruptcy proceedings, providing peace of mind that your future security remains intact.

However, utilizing a 401(k) plan isn’t just about the positives, so here are some cons to consider:

  • Limited access to your money before retirement: Most 401(k) plans restrict withdrawals before age 59 ½, imposing a 10% early withdrawal penalty plus income tax on distributions. This lack of liquidity can be problematic if you face unexpected financial emergencies or major expenses before retirement age.
  • RMDs after age 73: The IRS mandates that you begin taking distributions from your 401(k) once you reach age 73, regardless of whether you need the money. These forced withdrawals could push you into a higher tax bracket and increase your tax burden during retirement.
  • Limited investment options compared to IRAs: Most 401(k) plans offer a predetermined menu of investment choices selected by your employer or plan administrator. This restricted selection may prevent you from accessing investments that better align with your financial goals or risk tolerance.
  • Fees can erode returns over time: 401(k) plans often come with various fees, including plan administration costs, investment expense ratios and service charges. These ongoing expenses, while seemingly small, can significantly reduce your retirement savings over decades of investing. Note that this is often the case with any investment account, but you should still understand the fees you're responsible for.

How Taxes and Employer Matches Affect a 401(k)

Perhaps the greatest advantage of the 401(k) is that contributions to a 401(k) savings account are made pre-tax. When your employer sends out paychecks, the 6% (for example) of your income that you’ve decided to contribute to your 401(k) has already been withdrawn, before your employer has withheld anything for taxes. That leaves 6% less income to be taxed, and a lower immediate tax bill.

By comparison, think about what happens when you put money in a bank account: your employer sends you a paycheck, but chops off around 30% of it to give to the IRS and your state for withholding taxes. So, for every dollar of pre-tax income, you can only drop 70 cents into your savings account.

Of course, keep in mind that income sent to your 401(k) is not tax-exempt. Eventually, you will pay income taxes on it, but only when you withdraw it. If you don’t plan on doing so for 10, 20 or 30 years, that extra 30 cents has a long time to earn interest.

In addition to this, employer matching allows for every dollar you put into your 401(k) to be matched by your employer, typically up to a certain amount or percentage of your income. There’s no mystery here. If your employer promises to match all 401(k) contributions up to 6% of your income, and you contribute that amount every month, your employer will match you dollar for dollar, every month.

A common example of such a matching agreement is for the employer to match 100% of all contributions up to 6% of an employee’s income. If you make $100,000 a year, your employer will match annual contributions up to $6,000. So if over a year you contribute $6,000 to your 401(k), your employer will likewise contribute $6,000, and you get $12,000 total.

So let’s use the 401(k) calculator to show you how. For example, let’s say you are 40 years old and plan on retiring at the age of 67. That leaves 27 years for your current investments to gain value. Using the previous example, in which you make $100,000 per year, and your employer matches up to 6% of your income, you stand to earn over $10,000 more by putting your $6,000 in your 401(k) this year as opposed to a standard savings account, even if you assume both will garner the same 4% return rate.

Of course, a large part of that difference is a result of your employer’s matching funds. That extra $6,000 makes the calculation a no-brainer. Even without matching, the 401(k) can still could make financial sense because of its tax benefits.

Note that you may be able to make contributions above 6%, but your employer won’t match those additional dollars. So, if you contribute $10,000 over the year, your employer will only match the first $6,000. Still—that’s $6,000 extra into your account, and a 401(k) calculator can help you see how these matching contributions or larger yearly contributions can impact your retirement savings.

Tips for Retirement Planning

  • A financial advisor can help you plan out your long-term retirement goals and create a map to help you get there. 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.
  • If you’re not sure how much you need to save for retirement, consider utilizing a retirement calculator. It can help you estimate your total retirement financial needs and help you create a benchmark for your savings.

Best Places for Employee Benefits

SmartAsset’s interactive map highlights the counties across the country that are best for employee benefits. Zoom between states and the national map to see data points for each region, or look specifically at one of four factors driving our analysis: unemployment rate, percentage of residents contributing to retirement accounts, cost of living and percentage of the population with health insurance.

Least
Most
Rank County Unemployment Health Insurance Coverage Cost of Living Retirement Savings Contribution

Methodology Where are the places in the country with the best employee benefits? To answer that question we analyzed data on four factors: unemployment rate, percentage of residents contributing to employer retirement accounts, cost of living and percentage of the population with employer health insurance.

First, we looked at the percentage of the county population that is unemployed. We then indexed the ratio to 100, with a score of 100 representing the county with the lowest unemployment.

Next, we calculated the percentage of the population contributing to retirement accounts. We did this by multiplying the employed population of each county by the percentage of the population that have access to employee retirement plans, and then by the percentage of employees that participate in those plans. We indexed the final values to 100, with a value of 100 reflecting the county where the most people who have access to employee retirement plans are contributing to those plans.

Then we looked at the cost of living in each county as a percentage of the average income in that county. We indexed these values to 100, with a value of 100 reflecting that county where the ratio of cost of living to income is the lowest.

We then calculated the percentage of people in each county that have health insurance through an employer. We indexed these values to 100, with a value of 100 reflecting the county with the highest percentage of the population covered by employer-sponsored health insurance.

Finally, we calculated a weighted average of the indices for unemployment, percentage of residents contributing to employer retirement accounts, cost of living and percentage of the population with employer-sponsored health insurance. We indexed the final number so higher values reflect the best places for utilizing employee benefits.

Sources: US Census Bureau 2017 American Community Survey, SmartAsset, Bureau of Labor Statistics, National Compensation Survey, Kaiser Family Foundation