WHAT TO DO IF YOUR COMPANY STOPS MATCHING YOUR 401(K) CONTRIBUTIONS?
The chances are small that it will happen to you, but it is happening so let’s explore this “what if”. This has happened in the past and fortunately the match tends to be reinstated in a relatively short amount of time. Unfortunately, even short-term this affects your long-term planning. However, the most prominent realization that comes from events like this taking place, is that most people are solely dependent on their 401(k)s for the retirement savings. That’s the real issue with all of this, so let’s address that.
401(k)s came to be so that companies could cut the cost of offering pensions. 401(k)s then became workers go-to retirement savings plan because it comes out of their pay checks without them ever seeing it. When savings is forced it’s so much easier than cutting the check yourself. Even without a match we’re taught to put as much into our 401(k)s as possible so we can hope to one day retire. A hope we wouldn’t need if pensions were still a thing, but I digress.
Let’s talk general rule of thumb. If a company offer’s a match you contribute up to the match, because “hey it’s free money!” That still reigns true in most cases, but if there is no more match what do you do? Well, in my opinion, you stop paying into your 401(k) altogether.
The biggest benefit to putting into a 401(k) is it’s easy in an out of sight, out of mind kind of way. Just because it’s easiest doesn’t mean it’s best for you. Let’s look into investing the hard way now. Meaning you don’t spend every penny that makes it into your bank account, and you cut that retirement check yourself. If you can manage that, then go out and open a Roth IRA.
***Please note that 401(k)s and Roths are not investments, they’re just tax codes to hold your investments in. You can read more on that here.***
Roth IRA’s are funded with post-tax money, meaning money that has made its way into your bank account from a paycheck that has already been taxed by the IRS. Why Roths are so important to retirement savings is that they allow your investments to go tax-deferred, just like a 401(k), but you take the money out tax-free in retirement. 401(k)s are funded with pre-tax money, which means you pay taxes when you take the funds out in retirement.
Why is paying taxes now vs later important? The country is over 26 trillion in debt and that debt has to get paid by someone. That someone is you! Truth is we don't know what taxes will look like in the future, but the odds are they'll be higher. Much higher! So instead of gambling on it, pay them now and don't worry what they are in future by funding a Roth.
Ideally you still have an employer that's giving you a 401(k) match AND you're funding a Roth. But if you find yourself in a position where your employer cuts your 401(k) match then focus your efforts on fully funding your Roth. And even if they didn’t cut your match, look into funding a Roth anyways. Your future self will thank you!