In times of hardships, one may need to tap into the funds of their 401(k) account and make withdrawals. But these withdrawals are not without some significant drawbacks. If the hardship withdrawal on a 401(k) account of an employee below the age of 59 ½ does not fall in the exceptions bracket where the 10% penalty is waived off, it can spell as a greater loss to the employee’s future retirement saving amount. Apart from the 10% penalty, the employee will also have to pay income tax on the withdrawn amount. For example, if an employee below the age of 59 ½ and belonging to the 25% tax bracket, makes a withdrawal of $10, 000 from his/her account, he/she will have to pay a $1,000 as penalty and will have to pay $2,500 as tax that year. This means that the person will only be utilizing $6,500 from that $10,000.

The 401(k) plan is considered as one of the best and popular retirement saving vehicle available today. With this plan, an employee makes tax deferred contributions to the 401(k) account where these funds are in turn invested in investment vehicles like stocks, mutual funds, bonds etc. The earnings on these investments are also tax deferred. Hence, the employee’s money grows tax deferred and is taxed only upon withdrawal.  However, with so many transactions it can be difficult to understand all the jargon and calculations. Here are some of the basic calculations that one can make regarding their 401(k) account.

Calculating maximum contributions

Many a times, people consider tapping into the funds of their 401(k) to pay off debt. Some even consider stopping the tax deferred contributions to the 401(k) account to repay any outstanding debt. It may seem as sound option at first, but may have larger pitfalls in the near or distant future.

One of the great advantages of the 401(k) plan is employer contribution. This is kind of free money where an employer matches the contributions made by the employee. Some employers make up to a ‘50 cent to a dollar’ match which translates to 50% of employee contributions and there are some employers who make a ‘dollar for dollar’ match which is like a 100% return on investment.

Contributions to the 401(k) account are made of pre-tax deferrals. Hence, one puts money into their saving account before their pay is taxed and also, the earnings from investments made from these funds of the 401(k) savings are tax deferred. The funds are taxed only upon withdrawal from the account. This enables the employees to gather a good amount of savings for their retirement. And since these savings might be the primary providing factor for the employee after retirement, it is only natural that many would look for ways to increase or maximize them. Here are a few tips to increase 401(k) savings or to maximize 401(k) savings.

• Contribute and contribute more