If there’s one piece of advice that I, and just about every other personal finance blogger has written a thousand times it’s: “Always contribute enough to your 401(k) so that you get your employers full match.”
But what if your employer doesn’t match your 401(k) contributions? What should you do then?
It’s not a situation I ever gave much thought to. Then, right before the new year, the following email from the CEO of my company showed up in my inbox…
Needless to say, this did not make me a happy little worker bee. I had planned on making a significant increase in the amount of my 401(k) contribution, now I started wondering if I should even contribute at all.
If you find yourself in the same situation with your employer cutting its 401(k) match. Don’t make any rash decisions, it can still be worth it to contribute to a 401(k) with no match.
My first instinct was to immediately stop contributing any money at all, and get my résumé ready as soon as possible. However once I took some time to really think about my options, here is what I chose to do:
- Keep my 401(k) contributions at the same level – Even though my employer doesn’t match my contributions any more, there is still the possibility of a discretionary match if the company does well enough this year. If that happens I don’t want to miss out on it.
Contributing to my 401(k) will still lower my taxable income. There’s no reason to start giving more money to Uncle Sam just because my employer got cheap on me.
- Increase IRA contributions – I had been planning to more than double my 401(k) contribution as part of my plan to save 50% of my income this year. Instead of saving that money in my 401(k), I’ll now be diverting it to my IRA’s (both pre-tax and Roth). The reasons for this are pretty simple. 401(k)’s have very limited investment selections and carry a lot of different fees. In an IRA I can invest in anything my heart desires, and the fees will be much lower than my 401(k) because my IRA provider offers commission free trades on a lot of basic index funds and ETF’s. This means I only get hit with the expense fee of the funds I choose (which will be minimal because I stick with Vanguard funds & ETF’s!)
- Work on that Resume – My 401(k) match wasn’t overly generous to begin with. But the loss of it equates to about a 2.5% pay cut for the coming year. I was thinking of starting up a job search this year as it was, this will only accelerate that search.
Hopefully your company never slashes the match to your 401(k). However, if it does it’s not necessarily time to panic. Consider your options as far as contributing to IRA’s or using extra money to pay down debt. A 401(k) without a match isn’t useless though. Remember, a 401(k)’s purpose is to allow you to save for retirement on a tax-advantaged basis. Even without your employers matching funds it is still a very useful tool. Especially because it automates your savings directly from your paycheck.
Before taking any drastic action with your 401k contribution, use this calculator to see just how much your decisions will affect what your account balance will grow into. You might find that even small changes have a large impact on the future.
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Has your employer taken away your 401(k) match? If so, how did you handle the situation?
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