401k Calculator

401k Calculator

A 401(k) is a type of account where individuals deposit the amount pre-tax and defer the payment of taxes until withdrawing the same at the time of retirement. 401k calculator can be used to calculate that maturity amount subject to prescribed limits per authority rules.

401(k) Calculator

O * (1+i)F*n + I * ( ( 1 + i )F*n– 1 / i )


Wherein,
  • O is the starting account balance.
  • i is the rate of interest.
  • F is the frequency of interest is paid.
  • n is the number of periods for which 401(k) shall be made.
  • I is the periodical fixed amount invested at regular intervals
is the starting account balance.
$
interest rate
%
is the frequency of interest is paid
$
is the number of periods.
$
is the periodical fixed amount invested at regular intervals.
$

About 401k Calculator

The formula for calculating 401k is per below:

Periodical 401(k) is made then calculation :

O * (1+i)F*n + I * ((1+i)F*n – 1 / i )

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

O * (1+i)F*n + I * ((1+i)F*n – 1) * (1+i) / i )

Wherein,

  • O is the starting account balance
  • I is the periodical fixed amount invested at regular intervals
  • i is the rate of interest
  • F is the frequency of interest is paid
  • n is the number of periods for which 401(k) shall be made.

401(k), as stated above, is a type of retirement plan wherein the individuals contribute the amount pre-tax and defer the payment of taxes until retirement, and at the time of retirement, when they withdraw, they bear taxes on the entire amount. But however, there are certain limits that have to adhere to. One can deposit a maximum of up to $19,000 per year for the year 2019. Further, $6,000 is the additional limit that can be deposited if the individual is aging 50 years or more as of 2019. Further, if the individuals are salaried, then even employers can match their contribution amount, and that could be from 0% to 100% of their contribution and not more than say 6% of the annual salary. This is a good retirement plan for most individuals.

How to Calculate Using 401k Calculator?

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

Step #1 – Determine the initial balance of the account, if any, and also, there will be a fixed periodical amount that will be invested in the 401(k).

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

Step #3 – Now, determine the duration which is left from current age till the age of retirement.

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

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

Step #6 – Figure out whether an employer is also contributing to match with the individual’s contribution, and that figure plus value arrived in step 1 will be the total contribution in the 401(k) account.

Step #7 – Now, use the formula accordingly that was discussed above for calculating the maturity amount of the 401(k), which is made at regular intervals.

Step #8 – The resultant figure will be the maturity amount that would include the 401(k) income plus the amount contributed.

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

You can download this 401(k) Calculator Excel Template here – 401(k) Calculator Excel Template

Example #1

Mr. M is working in a multi-national firm, and he has been investing in a 401(k) account and has accumulated $1,234, and he earns $40,000 early, and he wants to contribute 15% of his annual salary. Further, the employer also contributes 50% of his contribution and limits the same up-to 6% of the annual salary. Mr. M wants to invest for the next 35 years. The rate of interest that he will earn will be 6% per annum, which will be compounded annually. The contribution will be made at the start of the year.

Based on the given information, you are required to calculate the amount that would be accumulated at the time of maturity.

Solution:

We are given the below details:

  • O = $1,234
  • I = Fixed amount deposited periodically which would be $40,000 x 15% which is $6,000 subject to $19,000 and employer’s contribution will be 50% of 6,000 which is $3,000 subject to 6% of salary which is $40,000 x 6% which is $2,400 and therefore total contribution will be $6,000 + $2,400 which is $8,400.
  • i = Rate of interest, which is 6.00% and is compounded annually
  • F = Frequency which is annually here, hence it will be 1
  • n = number of years the 401(k) proposed to be made will 35 years.

401k Calculator Example 1

Now, we can use the below formula to calculate the maturity amount.

401 (k) = O * (1+i)F*n + I * ((1+i)F*n – 1) * (1+i) / i )

401k Calculator Example 1-1

  • = 1,234 * ( 1 + 6.00% )1 * 35 + 8,400 * ((1+6.00%)1 * 35 – 1 * (1+6%)) / 6%
  • = 1,001,699.91

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

Example #2

Mrs. Seema has thought of opening 401(k) accounts for her retirement plan. She will be depositing $5,000 yearly, and her employer has also agreed to deposit 30% of her contribution subject to 5% of her annual salary. She has been drawing a salary of $50,000 per annum. The rate of interest will be 7% per annum compounded annually. She has 20 years left in her retirement. These contributions will be made at the beginning of the year.

Based on the given information, you are required to calculate the maturity amount.

Solution:

We are given the below details:

  • O = $0
  • I = Fixed amount deposited periodically which would be $5,000 subject to $19,000 and employer’s contribution will be 30% of 5,000 which is $1,500 subject to 5% of salary which is $50,000 x 5% which is $2,500 and therefore total contribution will be $5,000 + $1,500 which is $6,500
  • i = Rate of interest, which is 7.00% and is compounded annually
  • F = Frequency, which is annually here, hence it will be 1.
  • n = number of years the 401(k) proposed to be made will 20 years.

401k Calculator Example 2-1

Now, we can use the below formula to calculate the maturity amount.

401(k) = O * (1+i)F*n + I * ((1+i)F*n – 1) * (1+i) / i )

Example 2-2

  •  = 0 * ( 1 + 7.00% )1 * 20 + 6,500 * ((1+7%)1*20 – 1 * (1+7%) / 7%
  • = 285,123.65

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

Conclusion

401(k) is a type of retirement plan wherein the individual deposits money pre-tax and defer the taxes until retirement, and further individual takes a deduction for contributing the same and are then liable for taxes at the time of retirement on the entire amount.

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