401K Calculator Calculate The Contribution Amount Of An Individual

401k Calculator

About 401k Calculator

The formula for calculating 401k is as below:

401(k) Calculator

O * (1+i)Fn + I * ( ( 1 + i )Fn– 1 / i )

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

Periodical 401(k) is made, then calculation:

O * (1+i)Fn + I * ((1+i)Fn – 1 / i )

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

O * (1+i)Fn + I * ((1+i)Fn – 1) * (1+i) / i )

Wherein,

O 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 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. At the time of retirement, when they withdraw, they bear taxes on the entire amount. However, certain limits have to be adhered to. One can deposit up to $19,000 per year for 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, employers can match their contribution amount, which could be from 0% to 100% of their contribution and not more than 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 to calculate the maturity amount for the 401(k) account.

Step #1 – Determine the account’s initial balance, if any, and also, a fixed periodical amount 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 left from the current age until retirement.

Step #4 – Divide the interest rate by the number of periods the interest or the 401(k) 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) account.

Step #7 – Now, use the formula 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 amountMaturity AmountMaturity 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, including 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 are pre-tax, and deductions are taken for the contributed amount.

Example #1

Mr. M is working in a multinational 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 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.

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

Solution:

We are given below the details:

O = $1,234I = 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 annuallyF = Frequency which is annually here; hence it will be 1n = number of years the 401(k) proposed will be 35 years.

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

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

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

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.

You are required to calculate the maturity amount based on the given information.

O = $0I = 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 $6,500i = Rate of interest, which is 7.00% and is compounded annuallyF = Frequency, which is annually here; hence it will be 1.n = number of years the 401(k) proposed will be 20 years.
= 0 * ( 1 + 7.00% )1 * 20 + 6,500 * ((1+7%)1*20 – 1 * (1+7%) / 7%= 285,123.65

Conclusion

401(k) is a retirement plan wherein the individual deposits money pre-tax. It defers the taxes until retirement. Further, individuals take a deduction for contributing the same and are then liable for taxes on the entire amount at the time of retirement.

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About 401k Calculator#

401(k) Calculator#

How to Calculate Using 401k Calculator?#

Example #1#

Example #2#

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