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A 401(k) can be one of your best tools for creating a secure retirement. It provides you with two important advantages. First, all contributions and earnings to your 401(k) are tax-deferred. You only pay taxes on contributions and earnings when the money is withdrawn. Second, some employers provide matching contributions to your 401(k) account which can range from 0% to 100% of your contributions. The combined result is a retirement savings plan you can not afford to pass up.
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Definitions
- Annual salary
- This is your annual salary from your employer before taxes and other benefit deductions. Since your contribution and company match are based on the salary paid to you by your employer, do not include any income you may receive from sources other than your employer.
- Percent to contribute
- This is the percentage of your annual salary you contribute to your 401(k) plan each year. Most employers permit employees to contribute up to 15% of their salary to a 401(k).
- Annual contribution limits
- Your total contribution for one year is based on your annual salary times the percent you contribute. However, your annual contribution is also subject to certain maximum total contributions per year. The annual maximum for 2012 is $17,000. If you are age 50 or over, a "catch-up" provision allows you to contribute an additional $5,500 into your 401(k) account. It is also important to note that employer contributions do not affect an employee's maximum annual contribution limit.
It is important to note that some employees are subject to another form of contribution limitations. Employees classified as "Highly Compensated" may be subject to contribution limits based on their employer's overall 401(k) participation. If you expect your salary to be $115,000 or more in 2012 or was $115,000 or more in 2011, you may need to contact your employer to see if these additional contribution limits apply to you.
- Current age
- Your current age.
- Age of retirement
- Age you wish to retire. This calculator assumes that the year you retire you do not make any contributions to your 401(k). So if you retire at age 65, your last contribution happened when you were actually 64.
- Current 401(k) balance
- The starting balance or current amount you have invested or saved in your 401(k).
- Annual rate of return
- The annual rate of return for your 401(k) account. Historically the major stock indexes have averaged 10% to 12% per year. If you plan on withdrawing your money within five years, you may wish to choose a more conservative rate of return. This calculator assumes that your return is compounded annually and your deposits are made monthly.
- Employer profit share
- This is the percent of your salary matched by your employer in the form of a profit share. For example, if you have an annual salary of $25,000 and the employer profit share is 3%, your employer will add another $750 to your 401(k) account.
- Employer match
- An employer match is in addition to your annual contributions. It is based on a percentage of your annual contributions. This range can be anywhere from 0% to 100%.
For example, let's assume the employer matches 50% of the employee's contributions up to 6% of their salary. The employee earns $100,000 per year and contributes 10%. The results would be:
- $10,000 from the employee
- $3,000 from the employer (which is 50% of $6,000 or 6% of the annual
salary)
- Total: $13,000
Please read the definition for "Employer maximum" for a detailed description of maximum employer matching contributions. It is also important to note employer contributions do not affect the maximum amount allowed to be contributed by an employee. Matching contributions can be subject to a vesting schedule. See your plan information for details.
- Employer maximum
- This is the maximum percent of your salary matched by your employer regardless of the amount you decide to contribute. For example, let's assume your employer has a 50% match, up to a maximum of 6% of your annual salary. If you have an annual salary of $25,000 and contribute 6%, your annual contribution is $1,500. With a 50% match, your employer will add another $750 to your 401(k) account. If you increase your contribution to 10%, your annual contribution is $2,500 per year. Your employer match, however, is limited to the first 6% of your salary and remains at $750.
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