The End of the 401K Match and Random Thoughts on the 401k vs a Roth IRA
My company is about to stop matching my contributions to my 401k.
Beginning this month, my company is no longer matching my contributions to the company 401k. That’s essentially $2,000 less in compensation I’ll receive this year if they don’t match for the remainder of the year.
They do say that this is a temporary, precautionary move. Still, this is disappointing news.
I thought about making this post a rant about why that is a horrible cost-cutting idea (hurts those that are most responsible, doesn’t really save that much, etc.), but I decided instead to talk about what I’m going to do in light of this change. How am I going to respond?
I also don’t want to rant because I know (a) not everyone even has this benefit, to begin with, (b) not everyone even has a job right now, and (c) I don’t want to let them (my company) know it got to me. 😉
I can tell you upfront this doesn’t discourage me from saving for retirement (nor does the current economic situation, really). If anything both make me want to contribute more to retirement.
The one thing it definitely does though is make me rethink how I want my investment mix to look once I’m 5 years from retirement. Can you say ultra-conservative!
What’s Better Than a 401k?
Since I’m going to forge ahead, I guess the question I have to ask myself is, where does the 401k now fall in priority to the rest of my financial goals, and are there now better vehicles to help me achieve those goals?
The traditional order of action for retirement savings and improving your net worth has been:
- Contribute enough to get the 401k company match.
- Then, if you have more to save, put it to a Roth IRA and contribute the maximum.
- Then, if you have even more, go back to the 401k and max it out.
- And if you have even more than that, contribute to a taxable investment account.
The reason this is traditionally the way you’re instructed to invest is because of the limited number and higher cost of investment options held in a typical company 401k. Plus, some would tout the tax advantages of a Roth vs the 401k.
A Roth IRA is?
I just recently opened my first Roth IRA. And if you’ll remember, that was over and above my 401k matching and maxing out efforts.
And you might also remember those Roth IRA contributions I attributed to tax year 2008.
So, last year, I handled my 401k upfront to the max and then moved to the Roth. Basically, I did 1, then 3, then 2 in the list above. FYI…the Roth is invested in a stock market index fund, while the 401k is in a target-date fund.
This year, I really don’t see any reason to make a drastic change from that plan. I will attempt to max out 401k contributions by 12/31 and max out Roth IRA contributions by 4/15/10 for both my wife and I.
Since I plan to do both, I guess it doesn’t really matter what order I take it. In fact, I think the due dates lend themselves to doing it in that order. Do you agree? Let me know if I’m missing something here.
By the way, while I was writing this post I was also wrapping up 2008 taxes. It should be noted that maxing out my 2008 401k contributions saved me around $4,000 in taxes. Take that, upper tax bracket!
I feel like this post led to nowhere. Sorry bout that. Hopefully, it will at least spur you on to saving more for your retirement. The benefits can be huge, even if the company isn’t matching anymore.
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I recently retired but am still working part time at the same company and have a 401k there. If they stop offering the part time work can I still keep the 401k plan? If so, would I need to contriblue to it each yr ? Or could I roll it over into a Roth?
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Thanks,
 @bets The firm managing the 401K will determine if you can keep it there or not. They set the rules. You could definitely roll it over to an IRA. But would need to convert it to a Roth after that. A Roth and a 401K are taxed differently.
@Steven – “virtually everyone in reasonable health (the life insurance portion of the plan becomes costly if you are in bad to severe health) would have been much better off in a 7702 Private Plan than in their 401k over the past 10 years.”
You could say that about any investment other than stocks.
Good thing most people have 40-50 years to invest over their lifetime. And when they get to 10 years before retirement they can begin moving their stocks into cash and bonds. Or invest in stocks the whole time and then just wait a couple of years if a downturn like this happens.
Stop spinning the numbers just to make a sale.
I found this article researching for my own article I am working on “what’s better than a 401k” – There is a tax code section 7702 that allows the use of life insurance (hang in there) as an investment vehicle. This law was intended to close a tax loophole for the rich, but it created a phenomenal opportunity for low to upper middle class incomes.
The basic premise of a properly structured 7702 Private Plan is control, liquidity, and the opportunity to earn market based gains without the possibility of market losses. Although this investment plan is gaining popularity (one of the largest 7702 Private Plan administrators recently had to shut down new applications coming in because they are 2 months behind processing and the rate of applications is increasing.
In a 7702 Private Plan there are no deposit limits, payments to the plan are after tax and all funds grow tax deferred, income is 100% tax free and doesn’t increase taxation on Social Security. The bottom line is virtually everyone in reasonable health (the life insurance portion of the plan becomes costly if you are in bad to severe health) would have been much better off in a 7702 Private Plan than in their 401k over the past 10 years.
PT, I am referring to the fact that 401k contributions are not taxed until you are ready to begin withdrawals in retirement, while Roth IRA taxes are paid at the time of contributions. By ‘tax exposure’ I am referring to the marginal tax rate that you will need to pay — whether now or in retirement.
Ordinarily you cannot be certain whether rates will go up or down in which case a 50/50 split between paying taxes now/later might make sense. However, given the long term downward trend in tax rates and the current state of federal finances there is a better than even likelihood that marginal tax rates will increase in the future. In this instance, I might want to contribute more $$$ to Roth IRA thereby paying today’s tax rates in exchange for future tax-free withdrawals.
I hope this clarifies my point, PT. I always enjoy reading your posts, so I was hoping to offer something constructive in return.
Sorry to hear about that PT- but thanks for the mention. I think you have the right attitude-and hopefully for your company it will be temporary.
I am sorry to hear about your situation. I appreciate your positive attitude regarding the situation, but for a little levity — don’t. Just before I read your post, I saw this one ( http://finance.yahoo.com/news/More-CEOs-got-pay-hikes-than-rb-14921297.html?sec=topStories&pos=5&asset=&ccode= ) regarding CEO pay increases for 2008.
More importantly, I am more concerned with your future tax exposure. Whereas the limit on your 401k is likely $16,500 for 2009, it is only $5000 (depending on your income) for the Roth IRA. Even if you were to max out both, you would be placing about 77% of your contributions in a tax-deferred account. That percentage is higher with your current allocations.
Are you that confident tax rates will decrease in the future?
My company cut the 401k match in December, along with a 10% time and pay reduction.
I stopped contributing to the 401k since I needed the cash, but probably would have moved it to my Roth IRA instead — which doesn’t get filled every year anyway.
It all depends on what funds your employer offers. From where I sit, my Roth IRA offers better funds than the 401(k). There is also the tax consideration for most. Since not everyone makes enough to max out both funds, you have to decide if you want to pay taxes now or later. I prefer now so in the event of losing my employer match I’ll max out my roth first, then work on the 401(k).
From your point of view your method should work. Just remember most people don’t make enough for that to work and so maxing the Roth may be the priority.