Contribution Calculator for 401k

About 401(k) Contribution Calculator

The formula for calculating 401(k) Contribution as per below:

Contribution to 401(k)

( S x C ) + { ( S x C)* x E }

  • S is the Annual Salary.
  • C is the contribution of the employee.
  • E is the Employer’s contribution.

Contribution to 401(k)   ;

Periodical 401(k) Contribution is made then calculation:

In case the investment is made at the beginning of the period:

Wherein,

  • S is the Annual SalaryC is the contribution of the employeeE is the Employer’s contributionO is the starting account balanceAccount BalanceAccount Balance is the amount of money in a person’s financial account, such as a savings or checking account, at any given time. Furthermore, it can refer to the total amount of money owed to a third party, such as a utility company, credit card company, mortgage banker, or other similar lender or creditor.read moreI is the periodical fixed amount invested at regular intervalsi is the rate of interestF is the frequency of interest is paidn is the number of periods for which a 401(k) Contribution shall be made.
  • The maximum amount would be $19,000 per year for 2019** Employer contribution will be subject to any ceiling limits decided by the employer.

401(k) contribution calculator is a subset of 401(k) wherein first, we shall calculate the employee contribution amount, which cannot exceed $19,000. Further, the employer contribution will also be calculated subject to limits decided by the individual’s employer. 401(k) has certain limits as one is already taking deductions on the contributions made and is deferring the payment of taxes; hence is considered one of the best alternate plans for retirement since the employer will also be contributing to the retirement benefits of their employee.

How to Calculate Using a 401(k) Contribution Calculator?

One needs to follow the below steps to calculate the maturity amount for the 401(k) Contribution account.

Step #1 – Determine the initial balance of the account, if any. Also, a fixed periodical amount will be invested in the 401(k) Contribution, which would be a maximum of $19,000 per year.

Step #2 – Figure out the rate of interest that would be earned on the 401(k) Contribution.

Step #3 – Now, determine the duration left from the current age until retirement.

Step #4 – Divide the interest rate by the number of periods the interest or the 401(k) Contribution income is paid. For example, if the rate paid is 9% and compounds annually, the interest rate would be 9%/1, which is 9.00%.

Step #5 – Determine whether the contributions are made at the start or the end of the period.

Step #6 – Determine whether an employer is contributing to match the individual’s contribution. That figure plus the value in step 1 will be the total contribution in the 401(k) Contribution account.

Step #7 – Use the formula discussed above to calculate the maturity amount of the 401(k) Contribution, which is made at regular intervals.

Step #8 – The resultant figure will be the maturity amount, including the 401(k) Contribution income plus the amount contributed.

Step #9 – There would be tax liability at the time of retirement for the entire amount since the contributions are pre-tax, and deductions are taken for the contributed amount.

Example #1

Mr. HNK is working in a multinational firm, and he has been investing in a 401(k) Contribution account and has accumulated $2,900, and he earns $140,000 early, and he wants to contribute 25% of his annual salary. Further, the employer also contributes 30% of his contribution and limits the same up to 7% of the annual salary. Mr. M wants to invest for the next 25 years. The rate of interest that he will earn will be 5% per annum, which will be compounded annually. The contribution will be made at the start of the year.

You must calculate the amount accumulated at maturity based on the given information.

Solution:

We are given the below details:

  • The annual salary of Mr. HNK is: $140,000Contribution of Mr. HNK towards 401(k): 25%Employer Contribution: 30% of the contributionMaximum employer contribution: 7% of the annual salaryMaximum employer contribution: $9,800 (140,000 x 7%)

  • = ($140,000 * 25%) + (($140,000 * 25%) * 30%))= $45,500

Now here, an individual’s contribution cannot exceed $19,000, and hence the maximum amount that can be invested, including both, will be $19,000.

  • O = $0I = $19,000i = Rate of interest, which is 5.00% and is compounded annuallyF = Frequency which is annually here; hence it will be 1n = number of years the proposed 401(k) Contribution will be 25 years.

Now, we can use the below formula to calculate the maturity valueCalculate The Maturity ValueMaturity value is the amount to be received on the due date or on the maturity of instrument/security that the investor holds over time. It is calculated by multiplying the principal amount to the compounding interest, further calculated by one plus rate of interest to the period’s power.read more.

  • = 0 * (1 + 5.00% )1 25 + $19,000 * ((1+5.00%)125 – 1 * (1+5.00%) / 5.00%)= $952,155.62

When he withdraws the amount at the time of retirement, he will be liable for tax on the entire amount since the contributions are made pre-tax and deductions have been taken.

Example #2

Mr. A has been employed with ABC company for five years. Since he has completed five years in the firm, as per the firm’s policy, the company will invest 50% of his annual contribution, subject to a maximum of 8% of the annual salary. Mr. A is contributing 10% of his annual salary and is willing to do so for the next 30 years. He has been earning $30,000 a year, which is paid semi-annually.

Based on the given information, you are required to calculate the contribution amount that will be made by Mr. A and his employer.

  • Annual salary of Mr. A is $30,000Contribution of Mr. A towards 401(k): 10%Employer Contribution: 50% of the contributionMaximum employer contribution: 8% of the annual salaryMaximum employer contribution: $2,400

  • = ($30,000 * 10%) + (($30,000 * 10%) * 50%))= $4,500

Since an employer’s contribution is below 2,400 maximum limits, we can take $1,500.

Conclusion

401(k) Contribution, as discussed, is a type of calculator wherein an individual can calculate the amount he can invest in a 401(k) plan and what amount his employer will contribute. This is one plan wherein an individual can defer tax payments.

This has been a guide to the 401k contribution calculator. Here we discuss how to calculate the contribution amount of the 401k account of an individual, along with step-by-step examples. You may also take a look at the following useful articles –

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