401(k) Calculator
What is a 401(k)?
In the United States, a 401(k) is a retirement savings plan sponsored by an employer. It lets workers save and invest a piece of their paycheck before taxes are taken out. Taxes aren't paid until the money is withdrawn from the account (typically after age 59 ½).
The name comes from the subsection of the Internal Revenue Code that established the plan in 1978.
The "Free Money" Concept (Employer Match)
The biggest benefit of a 401(k) is the Employer Match. Many companies will match your contribution up to a certain percentage of your salary (often 3% to 6%).
This is mathematically the best investment you can make.
If you put $1 into your 401(k) and your boss puts in $1 (the match), you have instantly doubled your money. That is a 100% ROI before you even invest in the stock market. Always contribute enough to get the full match—otherwise, you are leaving part of your salary on the table.
Understanding Vesting
Be careful: The money your employer contributes might not be yours immediately. This is called "Vesting."
- Immediate Vesting: The match money is yours from Day 1.
- Cliff Vesting: You get nothing until you’ve worked there for X years (e.g., 3 years), then you get 100%.
- Graded Vesting: You get 20% ownership per year, becoming 100% yours after 5 years.
If you leave your job before you are fully vested, you keep your own contributions, but you may forfeit some of the employer match.
Pre-Tax vs. Roth 401(k)
Most 401(k) plans are "Traditional," meaning your contributions reduce your taxable income today.
- Traditional 401(k): You pay taxes when you withdraw the money in retirement. (Good if you think your taxes will be lower when you retire).
- Roth 401(k): You pay taxes now, but you pay zero taxes when you withdraw the money (and its growth) in retirement. (Good if you are young and expect your taxes to go up).
The Power of Compound Interest
The graph of a 401(k) is exponential. In the early years, most of your account balance comes from your own paycheck. But after 20 years, the "Compound Interest" (growth on growth) takes over.
If you check our calculator results, look at the "Compound Interest" line. For long timeframes (30+ years), the interest earned often exceeds the actual cash you put in by 3x or 4x.