Understanding Your 401(k) Contributions
Employee Deferral and Safe Harbor Match
In a 401(k) plan, an Employee Deferral refers to the portion of your salary that you choose to contribute to your retirement account. These contributions are deducted from your paycheck before taxes, lowering your taxable income for the year.
Example:
- Salary: $50,000
- Employee Deferral (5%): $2,500
This amount is deducted from your paycheck before taxes, meaning you’re taxed on $47,500 instead of the full $50,000.
Employer Safe Harbor Match:
-
Safe Harbor Match:
This is fully vested. This is essentially “free money” that grows with tax-deferred compounding.
Contribution Limits for 2025:
- Under the age of 50: The standard deferral limit is $23,000.
- 50 or Older: The deferral limit is $30,500, which includes a catch-up contribution.
Key Points:
When participating in a 401(k), understanding how your contributions and your employer’s contributions work is crucial—especially if your plan includes a Safe Harbor Match.
401(k) Contributions Overview (2023-2024)
| Contribution Category | 2023 | 2024 | Total |
|---|---|---|---|
| Employee Deferral | $7,407.35 | $9,175.16 | $16,582.51 |
| Employer Safe Harbor Match | $4,093.54 | $4,463.03 | $8,556.57 |
| Total Contributions | $11,500.89 | $13,638.19 | $25,139.08 |
| Category | 2023 Data | 2024 Data |
|---|---|---|
| Starting Balance | $22,529.66 | $38,139.86 |
| Additions (Contributions) | $11,500.89 | $13,638.19 |
| Employee Contribution (Deferral) | $7,407.35 | $9,175.16 |
| Employer Contribution (Safe Harbor Match) | $4,093.54 | $4,463.03 |
| Withdrawals | $0.00 | $0.00 |
| Transfers | $0.00 | $0.00 |
| Deducted Fees | -$31.56 | -$34.92 |
| Fee Adjustment | $0.00 | $0.00 |
| Gain/Loss | $4,140.87 | $6,125.60 |
| Ending Balance | $38,139.86 | $57,868.73 |
| Personalized Rate of Return | 14.61% | 13.59% |
Key Numbers (as of 01/26/2025)
| Category | Amount | Percentage |
|---|---|---|
| Total 401(k) Vested Balance (as of 01/2025) | $60,744.73 | |
| Employer Safe Harbor Match | $22,830.79 | 37.59% |
| Employee Deferral | $37,913.94 | 62.41% |
Early Withdrawal Impact
2024 Tax Brackets for Married Filing Jointly
| Tax Rate | Income Range |
|---|---|
| 10% | Up to $22,000 |
| 12% | $22,001 to $89,450 |
| 22% | $89,451 to $190,750 |
| 24% | $190,751 to $364,200 |
| 32% | $364,201 to $462,500 |
| 35% | $462,501 to $693,750 |
| 37% | Over $693,750 |
Taxes and Penalties:
| Category | Details | Amount |
|---|---|---|
|
401(k) Balance (as of 01/26/2025)
|
Total 401(k) Balance | $60,744.73 |
| Employee Deferral | $37,913.94 | |
| Employer Safe Harbor Match | $22,830.79 | |
|
Total Taxes and Penalties
|
Tax Withholding | $12,148.95 |
| Penalty | $6,074.47 | |
| Total Impact | $18,223.42 | |
|
Amount After Taxes and Penalties
|
Total Balance | $60,744.73 |
| Taxes and Penalties | $18,223.42 | |
| Amount After Withdrawal | $42,521.31 | |
|
Early Withdrawal Penalty
|
Total 401(k) Balance | $60,744.73 |
| 10% Early Withdrawal Penalty | $6,074.47 | |
| Total After Early Withdrawal Penalty | $54,670.26 |
Harm in Withdrawing Early:
- Immediate Losses: Taxes and penalties reduce the withdrawal amount to $42,521.31.
- Lost Employer Contributions: You would forfeit $22,830.79 of your employer’s Safe Harbor Match.
- Compounding Growth Loss: Your investments lose the potential for tax-deferred growth by leaving the 401(k).
Conclusion
While you may be confident in your stock market knowledge, early withdrawal from your 401(k) comes with significant downsides:
- $18,223.42 in taxes and penalties.
- Loss of free money from your employer’s match. (Penalty: **$6,074.47)
- Missed tax-deferred growth over the long term.
Instead of withdrawing early, consider other funds for investing or increase your 401(k) contributions to benefit from tax-advantaged growth and employer contributions.