- Self-employment income
- This is your annual income from self-employment. Your maximum contribution is based on your self-employment income; do not include any income you may receive from other sources.
- Annual contribution
- The amount you will contribute to your Individual 401(k) each year. All contributions are assumed to happen at the beginning of the year.
- Maximum annual contribution
- This is the maximum amount you are allowed to contribute to your Individual 401(k) account per year. In 2013, the maximum contribution to an Individual 401(k) is $51,000 for individuals under 50, and $56,500 for those 50 and over. Self-employment income of $$176,919 or more is required to qualify for the maximum contribution in 2013.
If you earn less than $$176,919 in 2013, your maximum is calculated as follows: First, as the employee, you are able to contribute up to $17,500 in 2013 to your Individual 401(k) or 100% of your self-employment income, whichever is less. For individuals age 50 or over, an additional $5,500 catch-up contribution increases this portion of your contribution to $23,000, but still limited to no more than 100% of your earned income. Second, you are allowed employer contributions - even though self-employed people are in-fact their own employee. Employer contributions, for the self-employed, are limited to an additional 25% of adjusted net business profits, up to the maximum total amount allowed per year.
As an example, consider a 25-year-old self-employed person with an net income of $40,000 per year. They would be able to contribute:
- $17,500 as an employee contribution
- $7,434 as an employer contriubution*
*This is 25% of adjusted net income $29,739. Adjusted net income is calculated as net business income of $40,000 - deduction for Self-Employment Tax of $2,826 divided by 1.25.
- $24,934 Maximum contribution for 2013
It is important to note that you may be subject to additional contribution limitations if you participate in an additional retirement program through another employer. For 2013, total retirement plan contributions are limited to $51,000 or 100% of your total compensation for the year ($56,500 if age 50 or older). This includes contributions to your Individual 401(k) as well as any other employer plan. It also includes profit matching and employer contributions. Contributions to a Traditional IRA or Roth IRA are not included in this limit. Catch-up contributions for individuals over 50 are also not included in this limit.
- Your current age.
- Age of retirement
- Age you wish to retire. This calculator assumes that the year you retire, you do not make any contributions to your Individual 401(k). So if you retire at age 65, your last contribution happened when you were actually 64.
- Current Individual 401(k) balance
- The starting balance or current amount you have invested or saved in your Individual 401(k).
- Annual rate of return
- The annual rate of return for your Individual 401(k) account. This calculator assumes that your return is compounded annually and your deposits are made monthly. The actual rate of return is largely dependent on the types of investments you select. The S&P 500 for the 10 years ending Dec. 31st, 2012 had an annual compounded rate of return of 7.1%, including reinvestment of dividends. From January 1970 through the end of 2012, the average annual compounded rate of return for the S&P 500, including reinvestment of dividends, was approximately 10.1% (source: www.standardandpoors.com). Since 1970, the highest 12-month return was 61% (June 1982 through June 1983). The lowest 12-month return was -43% (March 2008 to March 2009). Savings accounts at a bank may pay as little as 0.25% or less but carry significantly lower risk of loss of principal balances.
It is important to remember that these scenarios are hypothetical and that future rates of return can't be predicted with certainty and that investments that pay higher rates of return are generally subject to higher risk and volatility. The actual rate of return on investments can vary widely over time, especially for long-term investments. This includes the potential loss of principal on your investment. It is not possible to invest directly in an index and the compounded rate of return noted above does not reflect sales charges and other fees that funds and/or investment companies may charge.