Minimizing My 401k Contributions for Now

by Kevin on June 10, 2009

Last week I made a tough decision. I had been going back and forth on whether or not it was worth it to stop contributing to my 401k entirely.

Now before you go and get upset and burn me at the comment-stake for even considering this let me explain my reasoning.

Reasons to Stop Contributing to Your 401k

I can only think of two good reasons to stop contributing to your 401k.

  • You are trying to get out of debt
  • You have better investment options elsewhere or have very poor investment options in the 401k

That’s pretty much it. Some will debate that even if you are trying to get out of debt then you should still contribute to your 401k. I’ll get to that in a moment.

But if you are on a debt crusade then cutting down as many expenses as possible — including retirement savings — may be something you consider.

Otherwise the only reason you should avoid your 401k would be very poor investment options (or costs) within the 401k program. Moving that money to an IRA account where you can control what fund options you have (and thus what costs you incur) may be a better option.

Dropping My 401k Contribution to the Minimum

I’ve talked about my poor 401k in the past. A quick review: if I put in $1,000, my company will match $750. That’s the maximum match ($750). If I put in $10,000 then my match is still just $750.

I’m not one to turn down free money, and you shouldn’t be either. I’ve always planned to put in at least $1,000 just to get the match. To date I’ve put in almost $900. If I were to keep my investment percentages (the amount that is taken from my paycheck each week) the same as they are now I will end up putting well beyond the $1,000 goal.

So I decided to make a change.

I’m dropping my percentage down to the bare minimum — 1% — so that I can use that money for other purposes.

Why 1% and Not Dropping My 401k Completely

The reason I didn’t just wait until I got over $1,000 and drop the 401k contributions completely is simple: I don’t want to have to remember to reactivate the contributions at the beginning of next year. I also don’t want to have to remember to wait until I get over $1,000 to stop the contributions (because I would probably forget).

With the 1% contributions the account will slowly — very slowly — jump over $1,000 sometime in the next six months.

We will apply the extra money toward paying off our second mortgage as quickly as possible. If we weren’t currently maxing out our Roth IRA contributions the money could go toward that as well.

This is also a decent move for us because I’m not exactly thrilled with the investment options within the 401k. Remember inside our Roth IRAs I have greater control of what investment options I use and what costs I incur. Costs are hidden inside a 401k.

We’ll see how it goes, but I saw the change on this paycheck. We’ll see how it turns out. Am I crazy?

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Carnival of Money Stories
June 22, 2009 at 5:20 am


Kelly June 10, 2009 at 8:43 am

I think you made a wise decision.
I wish we were able to max out our retirement accounts AND pay off debt, but we’re not there yet.

The Happy Rock June 10, 2009 at 8:44 am

I shut down my 401k to get out of debt. It took my a little while into my debt destruction journey until I was so gung ho that I wanted to stop the 401k. The extra cash flow($300-400 a month) was a huge boost, plus turning it back on added more motivation to kill the debt.

As a side not, depending on the interest rate paying off debt is often a better investment mathematically.

The thing I didn’t hear you talk, but that may be relevant are how long till you get out of debt?

Aspirations Purse June 10, 2009 at 8:47 am

Not really. The only concern is time value of money and if you are invested elsewhere with better returns, there’s no need to do 401K besides the match

Steve @ Start-Up June 10, 2009 at 10:58 am

I don’t participate in my company’s 401k because they don’t match and I dislike the investment options. I take my self employed income and invest that in a Vanguard Individual 401k, which allows me the freedom to use any of the Vanguard index funds. If you wanted to invest in a 401k while the stock market is still depressed, I would highly recommend a Vanguard individual 401k. You could invest all of your tutoring money and avoid the ridiculous self-employed taxes on that income.

Finance Junkie June 10, 2009 at 7:06 pm

The correct course of action will vary amongst people. The key determinant is household job security and debt (amount and type).

I believe heavily in no 401k/ROTH contributions beyond 401k match if you have unsecured debt.

brooklynchick June 11, 2009 at 6:44 am

Smart move. I don’t know how old you are, but I am in my 30’s, and until I get out of debt, I put in only the minimum for the match (in my case, 6% of my salary – lucky me!).

M June 11, 2009 at 7:00 am

Only thing I wanted to add is you may need to check your W4 contributions so you don’t get any surprises come tax-time if you’re contributing significantly less to your 401K than before. I need to do that yet for this year since I also dropped my level of contribution.

Kevin June 11, 2009 at 8:44 pm

@Kelly: We do feel really blessed to be able to do this. I’ve just got to remember to increase it when the new year hits.

@TheHappyRock: Well it depends on everyone’s definition of debt. If you considered our mortgage, well, then it will be 10-15 or so years until we’re out of debt (if we kept up current extra payments). What I consider our real debt (that is, what the target is) are my deferred student loans (99% saved for) and our second mortgage. If we keep up the path we are on then we will have the 2nd mortgage knocked out by October or November of 2010. Super, super excited about that.

@Aspirations Purse: That’s the tough part. How can anyone really know how much you would make investing the money? The old rule of thumb used to be 10-12% and we see how that worked out.

@Steve: I’m actually considering this… a self employed IRA or 401k or something like that. Do you adjust your other contributions to show this? That is, let’s say you were contributing to a Roth IRA ($5k/year) and had $6,000 total you could save for retirement. Would you then put $5k into the self employed 401k and $1000 into the IRA?

@Finance Junkie: Ahh I like the unsecured debt part. Curious: would you consider an automobile loan secured debt? I would, but I’d still want to pay that off before investing due to the depreciation.

@brooklynchick: Thanks for stopping by! I’m 25.

@M: We aren’t using a traditional 401k — my work offers a Roth 401k and since I think taxes will go up eventually, that’s what I use. So the tax difference should be nothing for us.

M June 12, 2009 at 6:03 am

My work only recently started offering a Roth 401K as an option. Taxes may indeed go up, but so will your income in comparison. If you’re doing all post-tax though, agreed, it shouldn’t make as much of a difference in your current tax situation.

Russell Fascenda June 13, 2009 at 8:34 am

You can only think of two good reasons to stop contributing? How about reading the speculation that future income tax rates could be 50%. The whole premise of the deferred tax plans (IRA, 401k) was that you would defer paying tax at the current rate, in favor of future reduced tax rates resulting from having less income in the future.

I know it’s only speculation, and the 50% would be the top marginal rate on high earners, so it still may be an advantage. But I still have some concerns.

Also you said there are limits to contributing to the Roth IRA based on earnings, I think the rule is, if you participate in a 401k you cannot contribute before-tax money to a traditional IRA. And there are limits to how much you can contribute to Roth IRA in any case.

Kevin June 13, 2009 at 12:37 pm

@Russell: There are limits, but it’s still a lot of money for us. The tax rate issue is why I use a Roth 401k — I’d rather pay now and be guaranteed to be able to take the full amount with me when I retire.

Steve @ Start-Up June 16, 2009 at 11:22 am

@Kevin: I put all of my self-employed earnings into my individual 401k and then max out my Roth IRA on top of that. When I put my earnings into the individual 401k I don’t have to pay self-employed taxes on them, which allows me to not worry about the quarterly estimated payments.

I like investing my money into both a Roth IRA and an individual 401k because it allows me to diversify my withdrawals. If the tax rate is high I will withdraw from my roth IRA and if it’s low from my individual 401k. We all know the tax rate can change significantly every four years.

Kevin June 17, 2009 at 5:35 am

@Steve: Interesting. Yea I went with the Roth IRA and 401k simply because I’m betting on taxes going up over time. It may come back to bite me, but then at least I know I’ve paid my tax and the amount in my account is the actual amount in my account (rather than having to calculate taxes and withdrawal rates, etc.)

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