How a 401(k) grows
A 401(k) is a US employer-sponsored retirement account. You contribute a percentage of each paycheck, often before tax (traditional) or after tax (Roth), and many employers add a match, for example 50% of what you contribute up to 6% of salary. The money is invested, usually in mutual funds, and grows tax-deferred until retirement.
Employer match = min(your contribution, salary × match limit) × match rate
Balance = balance × (1 + return) + this year's contributions (added monthly)Worked example
Get the full match
The employer match is effectively an instant return on your contribution. If your employer matches up to 6% and you contribute only 3%, you're leaving part of your pay on the table. Most planners suggest contributing at least enough to get the full match before anything else.
Limits and rules to check
- The IRS sets an annual contribution limit, with an extra catch-up amount from age 50. Check the current year's figures on IRS.gov.
- Withdrawals before age 59½ usually incur a 10% penalty plus income tax, with some exceptions.
- Employer contributions may vest over several years; leaving early can forfeit part of the match.
- Required minimum distributions start in your 70s for traditional accounts.
This page is for US readers. If you're investing in India, see the EPF, NPS and retirement calculators instead.
Contribution rate: a quick guide
| Stage | Common target |
|---|---|
| Just starting | At least enough for the full employer match |
| Building | 10–15% of salary including the match |
| Catching up (50+) | Up to the IRS limit plus catch-up contributions |
Raising your contribution by 1% each year, often available as an automatic escalation feature, is an easy way to get there without feeling the pinch.
Frequently asked questions
Traditional or Roth 401(k)?
Traditional contributions lower your taxes now and are taxed on withdrawal; Roth contributions are taxed now and grow tax-free. It depends on whether you expect a higher tax rate now or in retirement.
What return should I assume?
Many planners use 5–7% a year after inflation for a diversified stock-heavy portfolio. Use lower rates to be conservative.
Does this include taxes?
No. Traditional 401(k) withdrawals are taxed as ordinary income in retirement.
Official references: IRS – 401(k) plans