Want to dial in your contribution rate and employer match, paycheck by paycheck?
| Year | Age | Employee contribution | Employer match | Investment growth | 401k balance |
|---|
What is a 401(k)?
A 401(k) is a retirement savings account offered through your employer. You choose a percentage of each paycheck to contribute, and that money goes into an investment account in your name. The plan gets its name from a section of the U.S. tax code.
A 401(k) is different from a regular savings account in two important ways. First, the money is invested in things like stock and bond funds, so it can grow over time. Second, it comes with special tax treatment that helps you keep more of your money.
Pre-tax contributions and tax savings
A traditional 401(k) contribution is pre-tax. The money is taken out of your paycheck before income tax is calculated, so your taxable income that year is lower. If you contribute $500 a month and your tax rate is 22%, you save about $110 a month in taxes. The $500 still goes into your retirement account, but only about $390 of it comes out of your take-home pay.
You will pay income tax on the money later when you withdraw it in retirement. The idea is that many people are in a lower tax bracket in retirement than during their working years.
The employer match
Many employers offer a matching contribution. A common version is "50% match up to 6% of salary," meaning if you contribute 6% of your salary, the employer adds another 3%. That match is essentially free money added to your retirement account.
Not contributing enough to get the full match is one of the most common money mistakes. If your employer offers a match, contributing at least up to the match cap is usually the highest-return move you can make.
Contribution limits
The IRS sets a yearly limit on how much you can contribute to a 401(k) from your own paycheck. The limit changes most years to keep up with inflation. Employer matches do not count against this limit.
The "Max 401k contribution per year" input on this page caps your employee contributions so the projection stays realistic.
Tax-deferred compound growth
Inside the 401(k), your investments grow tax-deferred. You do not pay tax on dividends, interest, or capital gains each year. All of those earnings stay in the account and keep compounding. Over decades, this can make a meaningful difference compared to a taxable brokerage account where gains are taxed along the way.
Why starting early matters so much
Because growth compounds, the years you save in your 20s and 30s usually contribute more to your final balance than the years in your 50s. A person who saves $500 a month from age 25 to 65 typically ends up with much more than someone who saves $1,000 a month from age 40 to 65, even though the second person puts in more total dollars.
Marginal tax rate
Your marginal tax rate is the tax rate that applies to your next dollar of income. It is usually higher than your average tax rate. Because 401(k) contributions reduce your taxable income, the tax savings on a 401(k) contribution are calculated using the marginal rate, not the average rate.
Common misconceptions
Some people think 401(k) money is "locked up forever." It is restricted, but there are several normal ways to access it in retirement starting at age 59½, and hardship rules exist for emergencies. Others think they cannot afford to contribute. Because of the tax savings and employer match, contributing often costs less out of take-home pay than the contribution amount suggests.
Key takeaway
A 401(k) combines three powerful forces: tax savings today, free money from an employer match, and decades of tax-deferred compound growth. Even small, regular contributions over a long career can grow into a retirement balance many times larger than the money you put in yourself.