401k calculator Definitions
401k calculator: A 401 (k) can be one of your best tools for creating a secure retirement. It provides two important advantages. First, all contributions and earnings in your 401 (k) are tax deferred. You only pay taxes on contributions and earnings when the money is withdrawn. Second, many employers provide matching contributions to your 401 (k) which may vary from 0% to 100% of their contributions. The combined result is a savings plan for retirement that you can not overlook.
Percent to contribute
This is the percentage of your annual salary you contribute to your 401 (k) each year. Most employers allow employees to contribute up to 15 percent of their salary to a 401 (k).
This is your annual salary from your employer before taxes and other deductions for benefits. Since your contribution and added company contributions are based on wages paid to you by your employer, do not include any income you may receive from other different sources to your employer.
Your current age
Age at which you wish to retire. This calculator assumes that you will not make any contributions to your 401 (k) in the year you retire. Therefore, if you retire at age 65, your last contribution happened in the year you were 64.
Current Balance 401 (k)
The starting balance or current amount you have invested or saved in your 401 (k).
Annual rate of return
The annual rate of return on your 401 (k). The percent of actual performance will depend largely on the type of investments you select. From January 1970 to December 2015 the percentage of weighted average yield for the index “S & P 500”, including reinvestment of dividends, was approximately 10.5% per year. During these years the best performance for a period of 12 months was 61% while the lowest was -43%. Savings accounts at a bank pay as low as 1% or less.
It is important to remember that future rates of return can not be predicted with certainty and that investments that pay a percent higher performance are subject to greater risk and volatility. The percent of actual performance may vary widely over time, especially in long-term investments, including the potential loss of principal on your investment.
The employer contributions are added in addition to their annual contributions and are based on a percentage of their annual contributions. This range can be from 0% to 100%. Generally, the additional employer contribution applies only to a limited portion of their salary. Please read the definition of ‘Employer maximum “for a detailed description.
This is the maximum percentage of your salary matched by your employer no matter how much you decide to contribute. For example, let’s assume that your employer adds 50% up to 6% of their annual salary. If you have an annual salary of $ 25,000 and contributes 6%, your annual contribution is $ 1500. With a contribution of 50% employer, your employer will add another $ 750 to your 401 (k). If you increase your contribution to 10% its annual contribution is $ 2500 per year. However, the contributions made by the employer, are limited to the first 6% of their salary and therefore remain at $ 750.
Limits annual contributions
Your total contribution for one year is based on your annual salary times the percent you contribute. However, your annual contribution is subject to certain total limits per year. The maximum annual amount for 2016 is $ 18.000. If you are 50 years of age or older, a new provision ‘to catch up’ allows you to contribute even more to your 401 (k). From 2016 employees of 50 years or more can deposit an additional contribution of $ 6,000 in your 401 (k). This amount is indexed to inflation after 2012.
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 full participation in 401 (k) employer. If you expect your salary to be $ 120,000 you may need to contact your employer to see if these additional contribution limits apply to you.