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:

  1. Contribute enough to get the 401k company match.
  2. Then, if you have more to save, put it to a Roth IRA and contribute the maximum.
  3. Then, if you have even more, go back to the 401k and max it out.
  4. 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.

Avatar About Philip Taylor, CPA

Philip Taylor, aka "PT", is a CPA, blogger, podcaster, husband, and father of three. PT is also the founder and CEO of the personal finance industry conference and trade show, FinCon.

He created Part-Time Money® back in 2007 to share his advice on money, hold himself accountable (while paying off over $75k in debt), and to meet others passionate about moving toward financial independence.

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  1. 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?
     
    Thanks,

    • Avatar Philip Taylor says

       @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.

  2. @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.

  3. Avatar Steven Duval says

    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.