Some people will suggest that it is a good idea to tap your 401k or stop making contributions when things get tight.
I truly believe that should be the last course of action and we’ll step through why.
The 401k was built with many advantages engineered into it.
Policy makers in Washington have truly tried to design a preferential investment vehicle and there are not many times you’ll hear me compliment that group.
Key Factors on deciding to stop contributing 401k
Here’s why to keep contributing even during tough times: 401k Contributions are tax-deductible.
You need to shield today’s earning from income tax. That makes such a significant impact in the final net worth of an investor. Paying taxes today works against the magic of compounding interest.
Employers often offer matches to contributions
As I explained in an earlier article employer matches are truly FREE MONEY.
The most common form of matching in a recent HR survey conducted at the end of 2018 was a one-to-one match for the first 3% of contributed funds.
Some firms reported as high as 7% match and others are at zero.
If you are fortunate enough to work for an employer that matches, by all means, take full advantage.
401k’s provide additional Protection
If you fall on financial hardship and have to declare bankruptcy, most courts will protect your retirement accounts.
Those funds will be protected from creditors.
The rest of your accounts are fully exposed, will be reorganized, and potentially liquidated to meet your debt obligations.
This protection will allow you to at least have a steady income producing portfolio while you build your nest egg back up.
The sole drawback is lack of investment opportunity
If the 401k plan selected by your company is truly terrible and the opportunity cost of investing outside of that plan is statistically superior (cost of funds, and historic performance) it may make sense.
Just remember most funds gravitate to the average.
Can you stop 401k contributions at any time?
Yes, it is your sole decision on whether you continue to contribute.
If you want to stop, you would go to your HR department and let them know that you want to reduce your percentage allocation to zero.
Just please consider the above benefits before doing so.
Lost retirement contributions are very difficult to make up later!
Can you stop 401k contributions temporarily?
Maybe a better solution is to stop for a small period of time, allow funds to build back up in your checking account so you feel more financially stable.
But then return to actively contributing to your 401k, and try to make up for the lost time/dollars forfeited during the break.
401k’s are truly one of the most special investment vehicles.
They allow pre-tax contributions, the funds can compound over time, employers PAY YOU to contribute, and the funds are often protected if you were to fall on financial hardship.
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