The 401(k) Calculator can estimate a 401(k) balance at retirement as well as distributions in retirement based on income, contribution percentage, age, salary increase, and investment return. It is mainly intended for use by U.S. residents.
401(k) Early Withdrawal Costs Calculator
Early 401(k) withdrawals will result in penalty. This calculation can determine the actual amount received if opting for an early withdrawal.
Maximize Employer 401(k) Match Calculator
Contribution percentages that are too low or too high may not take full advantage of employer matches. If the percentage is too high, contributions may reach the IRS limit before the end of the year. As a result, employers will not match for the rest of the year. This calculation can show the contribution percentage window in order to take full advantage of the employer's matching contributions.
The 401(k) retirement savings plan in particular falls under the category of pensions called Defined Contribution Plans (DCP). Unlike its counterpart, the Defined Benefit Plan which is merely based on formulas to determine retirement withdrawals, DCPs allow their account holders to choose from a variety of investment options. Employees (the account holders) can contribute up to a certain percent of their pre-tax salaries into their 401(k) plans each month; however, employers reserve the right to set limits on these monthly contributions. On top of that, the IRS sets annual limits on total annual employee contributions, which increases along with general cost-of-living due to inflation. The 2015, 2016, and 2017 deferral limits for 401(k) plans were $18,000 and the 2018 limit is $18,500. Many employers match parts of their employee's contributions, and this is the reason for their popularity amongst different retirement plans, along with other DCPs. There is no ceiling on the amount employers can contribute, except that annual contributions to an employee's account cannot exceed the lesser of 100% of the participant's compensation, or $55,000 (in 2018). Both contributions, from employee and employer, go into 401(k) plans untaxed, and the funds inside grow tax-free over time. The withdrawals are taxed, though from an advantageous standpoint when retired account holders are most likely in lower tax brackets.
Contributions and their subsequent interest earnings inside 401(k) plans cannot be withdrawn without penalty before the age of 59 ½, except in some cases, such as the account holder:
- passes away, and the account is paid to their beneficiary
- has a qualifying disability
- terminates employment when they are at least 55 years old
- withdraws an amount less than allowable as medical expense deductions
- withdraws an amount that is related to qualified domestic relations orders
- begins substantial equal periodic payments. See IRS rule 72(t) for more information
Withdrawn amounts from these scenarios are still subject to ordinary income taxes, but not the 10% early withdrawal penalty.
Early withdrawals carry relatively hefty price tags. As such, account holders may want to be wary before deciding to do so. In some dire situations, account holders may be forced to withdraw from their 401(k)s, regardless of penalties and taxes. Medical emergencies and pressing debt obligations are legitimate reasons for having to do so. However, remember to consider any and all options to pay for these before directly choosing to liquidate a 401(k).
401(k) Distributions in Retirement
Anyone older than 59 ½ can begin receiving distributions from their 401(k)s, but they can choose to defer receiving distributions until the age of 70 ½. Between these ages, people have several options:
Obviously, it is possible to start receiving distributions, whether opting for the lump sum or installment distributions. When choosing the installment option, one of the hardest decisions to make is exactly how much to withdraw each month or year. There are many factors to consider, such as life expectancy, investment performance, how much is required to live comfortably, and Social Security. A common rule of thumb is the 4% rule, which suggests withdrawing 4% annually. Adjust up or down for individual situations. With that said, each distribution must be at least the required minimum distribution (RMD), which is calculated based on life expectancy and the account balance at the end of the previous year.
It is also possible to rollover into an IRA or another employer's plan. No taxes will be imposed on rollovers. Both Roth and traditional IRAs generally offer more investment options. Moving after-tax money into a Roth IRA can help diversify retirement portfolios. Keep in mind that when rolling over into traditional IRAs, they also require minimum distributions at age 70 ½.
Some plans allow 401(k)s to be converted into annuities, which are usually offered through private insurance companies. Similar to rollovers, no taxes will be imposed on conversions. However, annuities are highly complex and difficult to understand. It is best to consult with a financial advisor to determine whether it is feasible to buy an annuity using a 401(k).
If there is no need to reach into 401(k)s immediately and there are adequate savings elsewhere, it can make sense to postpone distributions and let savings in a 401(k) continue to earn income. Generally, the longer distributions are postponed closer to the age at which they are required to be taken, 70 ½, the greater the chance for the account balance to grow.
Required Minimum Distributions
Anyone that reaches age 70 ½ will be required to start taking distributions from their traditional 401(k)s or IRAs, as per IRS regulations. The actual deadline for this is April 1st of the year after 70 ½ is reached. The federal penalty for not taking the RMD is a 50% tax on any amount not withdrawn in time. There are rare exceptions to the RMD for those who are still working and contributing to their retirement plans after this age. The amount of the required distribution is based on the prior year's December 31st account balance and an IRS life expectancy chart.
401(k)s Compared to Other Retirement Plans
- Tax-Deferred Growth—Similar to traditional IRAs or deferred annuities, growth of investments with a 401(k) are tax-deferred, which means earnings on interest, dividends, or capital gains accumulate tax free. This gives these retirement plans an advantage over other methods of saving for retirement, such as cash, active investing accounts, or real estate.
- Employer Matching—401(k)s are known for their employer matching features. A survey has shown that 43% of employees prefer a higher employer contribution into their 401(k)s with a pay cut, rather than the other way around2. Experts have likened the aspect of employer matching of 401(k)s to "free money", or "pay raises" that should never be left on the table. Different employers use different methods of matching, such as a percentage of salary up to certain levels, or as a percentage of contributions up to a limit.
- Tax-Deductible—Contributions to traditional IRAs and other retirement plans may or may not be tax deductible, as they can depend on tax brackets and other retirement plans being used in conjunction. On the other hand, contributions into 401(k)s, both from employees and employers, are always tax deductible because they reduce taxable income, lowering total taxes owed.
- High Contribution Limits—401(k)s have relatively high annual contribution limits. As mentioned before, for 2018 the limit is $18,500 for those under 50, and $24,500 for those over 50. On the other hand, $5,500 is the combined, annual IRA limit, and those above 50 have a limit of $6,500.
- Low Investment Options—Generally speaking, 401(k)s have fewer investment options than most; because they mostly originate from employers, they are limited to what is offered through employers' 401(k) providers, as compared to a typical, taxable brokerage account.
- Illiquid—While rare cases allow for the withdrawal of 401(k) funds without penalty, the structure of 401(k)s as a way of saving for retirement makes assets relatively illiquid. To reap the financial benefits, contributions, earnings, and growth are expected to be untouched until retirement, which can be many decades away. The idea of setting aside large amounts of money for that long can be unsettling for some.
- Vesting Periods—Employers may utilize vesting periods, meaning accrued assets by employees aren't fully in their ownership until after certain time periods. For instance, if an employee were to part ways with their employer and a 401(k) plan that they were 50% vested in, they can only take the half value of the assets contributed by their employer.
- Waiting Periods—Some employers don't allow participation in their 401(k)s until after a waiting period is over, usually as an incentive to reduce employee turnover, which hurts their bottom line. According to a survey, 41.60% of employers required employees to wait six months or more before participating in their 401(k) plans, and 27.20% had a one-year waiting period, which is the longest permitted by law. Long periods (up to one year) of abstaining from saving for retirement can require some catching up in the future.
Similar to Roth IRAs, Roth 401(k)s are retirement plans with after-tax contributions. Not all employers that offer the traditional 401(k) also offer the Roth variety as an option. The same annual contribution limits of $18,500, or $24,500 for 50 or older still apply here.
However, unlike the IRA version, contributions can't be withdrawn from a Roth 401(k) until five years after the plan starts. On the other hand, a Roth IRA's contributions (not earnings) can be withdrawn at any time, which is one of their main incentives as a form of retirement savings. This rule for the Roth 401(k) applies even after the age of 59 ½, when tax-free distributions are generally allowed. Also unlike the Roth IRA, this plan has required minimum distributions (RMD) at age 70 ½, though a workaround to this is to simply roll it into a Roth IRA without tax hits. This can come in handy for anyone who wants to take distributions out later than usual or to pass the funds to heirs.
It is possible to contribute to both forms of 401(k) simultaneously, as long as the sum of contributions into either are still below the annual contribution limits. This can be a good idea simply because it adheres to a generally accepted rule-of-thumb regarding most investments: diversify. In this particular case, there is tax being deferred into retirement (traditional 401(k)) and taxation occurring right away (Roth 401(k)). Contributing to them simultaneously can reduce exposure to risk.