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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