IRA / 401(k) / 403(b) Retirement
Project retirement savings and possible withdrawals.
About the IRA / 401(k) / 403(b) Retirement
IRA, 401(k) and 403(b) accounts grow without tax dragging on them each year, which is why the same contributions end up far ahead of an ordinary account.
How to use it
- Enter your current balance and annual contribution.
- Add any employer match.
- Enter your expected return and years to retirement.
The formula
The growth arithmetic is ordinary compounding. What makes a 401(k), 403(b) or IRA different from a savings account is not the maths — it is the tax wrapper and the employer match, and those are worth more than any rate you will negotiate.
FV = P(1 + r)n + (PMT + Match) × [(1 + r)n − 1] ÷ r
A typical match is 50% of your contributions up to 6% of salary. On $70,000 that means contributing $4,200 and receiving $2,100 — an immediate 50% return, before the market does anything at all. Left to compound for thirty years at 7%, that $2,100 a year becomes about $213,000.
The wrapper matters nearly as much. In a traditional account you deduct contributions now and pay income tax on withdrawals; in a Roth you pay tax now and withdraw tax-free. Neither is universally better: traditional wins if your tax rate falls in retirement, Roth wins if it rises.
Worked examples
| Account | Tax on contributions | Growth | Tax on withdrawal | Suits |
|---|---|---|---|---|
| Traditional 401(k) / 403(b) | deducted now | tax-deferred | taxed as income | high earners now |
| Roth 401(k) / Roth IRA | paid now | tax-free | none, if qualified | lower bracket now |
| Traditional IRA | deducted, with income limits | tax-deferred | taxed as income | no workplace plan |
| Taxable brokerage | paid now | taxed yearly | capital gains | money needed before 59½ |
The order most planners suggest follows directly from this table. Contribute enough to capture the full employer match first, because a 50% instant return is not available anywhere else. Then favour the wrapper that matches your tax expectation. A taxable account comes last, not because it is bad, but because it is the only one paying tax on growth every single year.
Common mistakes
- Leaving the employer match on the table. Contributing less than the match threshold is declining part of your salary. At $70,000 with a 50% match to 6%, that is $2,100 a year refused — roughly $213,000 over thirty years at 7%.
- Assuming the money is available. Withdrawals before 59½ generally incur a 10% penalty on top of income tax. There are exceptions, but a retirement account is a poor emergency fund.
- Ignoring fees inside the plan. A 1% annual fee sounds trivial and consumes a large share of a lifetime of growth. Check the expense ratios of the funds offered; the difference between 0.05% and 1.00% compounds against you exactly as returns compound for you.
- Cashing out when changing jobs. Taking the balance in cash triggers tax and penalty and ends the compounding. Rolling it into an IRA or the new employer's plan keeps the shelter intact and usually takes one form.
Terms explained
- 401(k) / 403(b)
- Workplace retirement plans — 403(b) is the version for schools and non-profits. Contributions come out of payroll, often with a match.
- IRA
- An individual retirement account you open yourself, independent of an employer. Lower contribution limits, usually far wider investment choice.
- Employer match
- Money your employer adds based on what you contribute. The highest guaranteed return available to most people.
- Vesting
- The schedule on which matched money becomes irrevocably yours. Your own contributions always are; the match may take several years.
- Roth
- A tax treatment, not an account type. Contributions are taxed now, qualified withdrawals are not taxed at all.
- RMD
- Required minimum distribution: the amount traditional accounts must start paying out in your seventies, whether you want the income or not. Roth IRAs are exempt for the owner.
Common questions
- How much should I contribute?
- Enough to capture the entire employer match, at minimum — below that you are declining salary. A frequent target is 15% of gross income including the match, adjusted for when you started.
- Traditional or Roth?
- Traditional if you expect a lower tax rate in retirement than today, Roth if you expect a higher one. Early career, with a modest salary and decades of tax-free growth ahead, Roth often has the edge.
- What is the difference between a 401(k) and a 403(b)?
- Mostly the employer. A 403(b) serves public schools and non-profits. Contribution limits and tax treatment are broadly the same; investment menus and fee structures often are not.
- What happens to my 401(k) if I leave?
- Your own contributions are always yours; the match follows the vesting schedule. You can usually leave it, roll it into an IRA, or move it to a new employer's plan. Cashing out costs tax, penalty and every future year of compounding.
- Can I contribute to both a 401(k) and an IRA?
- Yes, though having a workplace plan can limit whether traditional IRA contributions are deductible, depending on income. The Roth IRA has its own income limits.
- When can I take the money out?
- Generally at 59½ without penalty. Earlier withdrawals usually cost 10% plus income tax, with exceptions for specific hardships and for separation from service at 55 in some workplace plans.
- Do fees really matter that much?
- Yes. A percentage point of annual fee compounds against you for the entire holding period, and over a career it commonly costs a six-figure sum. It is the one variable you can reduce with certainty.
- Is the employer match part of my contribution limit?
- No. Your own deferrals have their own annual limit; the match falls under a separate, much higher combined cap. Receiving a match does not reduce what you may contribute yourself.