Free Guide to 401(k) Planning and Calculator Resources

Understanding 401(k) Basics: What This Retirement Plan Is and How It Works

A 401(k) is a retirement savings plan that many employers offer to their workers. The name comes from a section of the U.S. tax code. Unlike a regular savings account, money you put into a 401(k) grows with tax advantages, meaning you may pay less in taxes on that money now or when you withdraw it later.

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Here's how a basic 401(k) works: You decide how much money to take from your paycheck before taxes are calculated. Your employer sends that money directly into your 401(k) account. You then choose how to invest that money—usually by picking from a list of mutual funds or other investment options your employer's plan offers. Over time, your money grows through investment returns. When you reach age 59½, you can generally start taking money out without penalties.

According to the U.S. Bureau of Labor Statistics, about 51% of private-sector workers have access to a 401(k) or similar plan through their job. However, not all workers take advantage of these plans. In 2023, roughly 32% of eligible private-sector employees chose not to participate, which means they missed out on potential retirement savings growth.

There are two main types of 401(k) plans: traditional and Roth. With a traditional 401(k), you reduce your taxable income now by contributing money, and you pay taxes when you withdraw the money in retirement. With a Roth 401(k), you pay taxes on the money now, but withdrawals in retirement are generally tax-free. The choice between these depends on your current tax situation and what you expect your taxes to be in retirement.

Many employers also offer matching contributions. This means if you contribute a certain percentage of your salary, your employer will add money to your account too. For example, an employer might match 50% of what you contribute, up to 6% of your salary. This is essentially free money for your retirement.

Practical takeaway: Before using any calculator or planning tool, understand that a 401(k) is primarily a tax-advantaged savings account for retirement, not an investment guaranteed to grow at any specific rate. Employer matching, when available, is a significant financial benefit worth understanding.

Key 401(k) Contribution Limits and Rules for 2024

The IRS sets yearly limits on how much you can contribute to your 401(k). For 2024, employees can contribute up to $23,500 to a traditional or Roth 401(k). This is the employee deferral limit—the amount that comes from your paycheck. If you're age 50 or older, you can contribute an additional $7,500 as a "catch-up" contribution, bringing your total to $31,000.

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These limits include only what you contribute from your paycheck, not what your employer contributes through matching. Your employer's matching contributions count toward a different, higher limit. The total amount that can go into your 401(k) account from all sources (your contributions plus your employer's contributions) cannot exceed $69,000 in 2024, or $76,500 if you're 50 or older.

It's important to understand that these limits change periodically. The IRS adjusts them for inflation roughly every year. For example, in 2020, the employee deferral limit was $19,500. By 2024, it had increased to $23,500. If you're planning for retirement, you should check the current year's limits rather than relying on numbers from previous years.

There are also rules about when you can access your money. If you withdraw money before age 59½, you generally must pay a 10% early withdrawal penalty plus income taxes on the amount withdrawn. Some exceptions exist—for example, if you're facing a financial hardship, certain employers allow hardship withdrawals, though you'd still owe taxes. Additionally, you must begin taking required minimum distributions (RMDs) when you reach age 73, starting in 2023 (this age was raised from 72 following recent tax law changes).

Another important rule involves vesting. This describes when you actually own the employer's matching contributions. Some employers give you immediate ownership of their matching money. Others require you to work there for a certain period—such as one to six years—before you own those contributions fully. If you leave your job before you're fully vested, you may lose some or all of the employer match.

Practical takeaway: Knowing your plan's contribution limit and vesting schedule helps you make informed decisions about how much to contribute and when job changes might affect your retirement savings.

Types of 401(k) Plans and How They Differ

While traditional and Roth 401(k)s are the most common types, several other variations exist. Understanding these differences helps you make better decisions about your retirement savings.

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A Solo 401(k), also called an individual 401(k), is designed for self-employed people or small business owners with no employees. These plans allow you to contribute both as an employee and as an employer, which can result in much higher contribution limits. For example, a self-employed person could potentially contribute $31,000 as an employee (for 2024) plus up to 25% of their business income as employer contributions.

Some employers offer SIMPLE 401(k) plans. These are designed for smaller businesses and have lower contribution limits than standard 401(k)s. For 2024, employees can contribute up to $16,000 to a SIMPLE 401(k), compared to $23,500 for a standard 401(k). However, SIMPLE plans are simpler and less expensive for employers to administer.

Safe Harbor 401(k) plans are another option. These plans require employers to make certain contributions, but in return, they're exempt from some testing requirements. From an employee perspective, they function similarly to standard 401(k)s, but the employer must either match contributions dollar-for-dollar up to 3% of your salary or contribute 3% of your salary regardless of whether you contribute.

There's also the question of whether your plan allows loans. Some 401(k) plans permit you to borrow money from your own account. You'd repay the loan to yourself with interest. While this sounds convenient, borrowing from your retirement savings reduces the amount available to grow for retirement, and if you leave your job before repaying the loan, you typically must repay it quickly or face taxes and penalties.

An increasingly common addition to 401(k) plans is the Roth option. Many traditional 401(k) plans now allow you to designate at least a portion of your contributions as Roth contributions. This gives you flexibility to split your contributions between pre-tax and post-tax options.

Practical takeaway: The type of 401(k) your employer offers (or that you might set up as a business owner) significantly affects how much you can save and what rules apply. Reviewing your specific plan documents helps clarify what's available to you.

Using 401(k) Calculators: What They Show and Their Limitations

Online 401(k) calculators are free tools that use math to estimate how much money you might have in your 401(k) at retirement. These calculators can be useful for understanding general concepts, but they have real limitations you should understand.

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Most basic 401(k) calculators ask for information like your current age, current 401(k) balance, how much you plan to contribute yearly, your expected investment return rate, and the age when you plan to retire. The calculator then projects forward to show an estimated balance at retirement. For example, if you're 35 with $25,000 in your account, contribute $10,000 yearly, and assume a 6% annual return, a calculator might show you'd have roughly $620,000 at age 65. However, that's an estimate based on assumptions, not a prediction.

The biggest limitation of 401(k) calculators is that they rely on assumptions you provide. If you assume a 7% investment return but actually earn 4%, your real balance will be significantly lower. If you assume you'll contribute $10,000 yearly but only contribute $5,000, your results will be very different. Markets also fluctuate—some years gain 15%, other years lose 10%. A calculator can't account for these real-