What is a 401(k) plan?
A 401(k) plan is a tax-qualified employer-sponsored retirement plan where the eligible employees contribute a portion of salary before taxation. It is the most popular type of employer-sponsored retirement plan. Most of the employee depends on the amount saved on 401(k) plan they receive after retirement. There are restrictions on how and when to withdraw these assets by the employee and penalties may apply if withdrawn when the employee is under the defined retirement age.
Important facts about 401(k):
- The employee can borrow up to half of the retirement plan with the 401(k).
- No credit check is needed for this savings plan.
- The employers have to disclose all fees and penalties related to the plan.
- This retirement plan is not in existence until the 1980’s and they are only available to a small number of companies.
- Based on the pension protection act allows the employer can auto-enroll employee in this type of plans.
Advantages and disadvantages of 401(K):
- Can have other plans too: The main advantage of 401(k) plan is the person can still invest into other plans.
- High contribution limits: The amounts of money that can be invested into a 401(k) plan have a limit but it high.
- Employers Match: Most of the companies offer this plan to the employees match a certain amount of the contribution. But the fact is the amount that is given to the employee as benefits for working for the organization.
- Companies of any size: The Company’s size doesn’t matter. Every employee can take the advantage of 401(k) plan.
- Lower taxes: As some part of the salary is deposited into the federal saving account. The person is not taxed on that money.
- Forced to withdraw: The money deposited is 401(k) plan is forced to withdraw the money and no longer contribute from a certain age. The age limit is 70 and a half-year.
- Waiting periods: In 401(k) plan the employee has to wait for the longer period to start the contribution. The waiting period is up to a year and should ensure that the person will stay at the company.
- Money is still taxed: The money saved in a 401(k) plan is taxed when the person withdraws the money. The large portion of retirement fund may be lost by taxation.
The 401(k) retirement plan is mainly divided into two categories:
- Defined benefits plan: In this plan, the employer promises to pay a fixed amount to the retiree after meeting particular eligibility criteria. The plan pays a defined lifetime monthly benefits to the retiree.
- Defined contribution plan: In this plan, the contribution the employer can make on the employee, not as the benefits after retirement. With this type of plan, the employee is allowed to make pre-tax contributions to the plan.
The components included in the 401(k) calculator:
- Current age: The current age of the employee.
- Current annual salary: The current annual salary of the employee.
- Current 401(K) balance: The balance present in the 401(k) plan.
- Contribution: The contribution made by the employee for the 401(K) plan.
- Employer match: The percentage of the amount that is matched with the employer.
- Employer match limit: The percentage limit of an employer match. It may vary based on the organization.
- Expected retirement age: The expected retirement age of the employee.
- Life expectancy: The expected lifespan of the employee.
- Expected salary increase: The expected salary increase of the employee over the time.
- Expected annual return: The expected annual rate of return on the investment.
- Expected inflation rate: The expected Inflation rate of the money over the time.
401(K) early withdrawal costs calculator:
- Early withdrawal amount: The amount that the employee wants to withdraw early.
- Federal income tax rate: The federal income tax rate on the amount invested in the 401(k) plan.
- State income tax rate: The state income tax rate on the amount invested in the 401(k) plan.
- Local/city income tax rate: The local/city income tax rate on the amount invested in the 401(k) plan.
- Presently employed or not.
- Any disabilities.
- Any other penalty exemptions.
- Employee match check calculator.
This 401(k) calculator is used to estimate the 401(k) balance at the retirement and distributions in the retirement funds based on the income of the employee.