Last Update: Thursday, April 17, 2014
|ASK CARRIE- If You're Not Getting a 401(k) Match, Is It Worth Making the Contribution?|
|Written by CARRIE SCHWABPOMERANTZ, Creators Syndicate|
|Thursday, 12 May 2011 03:09|
Dear Carrie: My company for has not made any contributions to our 401(k) for over two years. Does it still make sense to stay in this retirement plan? — Ann
Dear Ann: I'm a broken record on the importance of saving for retirement. It's also no secret that I'm a big fan of company plans such as 401(k)s, especially when they provide matching contributions.
But you ask a great question. Since the employer match is one of the highlights of many plans, does it make sense to contribute if you're not getting this extra benefit?
In a word, yes. Let's run through the reasons and then take a look at your other options. 401(K) BENEFITS
• Investing on autopilot: One of the best features of a 401(k) or 403(b) plan is that it puts saving and investing on autopilot through payroll deduction. It's the ultimate way to "pay yourself first."
• Pretax contributions: The ability to fund your 401(k) with pretax dollars can also be a huge plus. Just as an example, if you're in the 28 percent tax bracket, a $1,000 investment saves you $280 in taxes (plus a possible reduction in state income taxes).
You'll pay taxes on the money when you take it out, but in the meantime, you've made a $1,000 investment for just $720 — definitely worth doing.
Note that many companies now also offer a Roth 401(k) — in which case you trade the current tax deduction for the ability to withdraw your money taxfree down the road. This can be another great way to save.
• Tax-deferred growth: As I'm sure you know, you don't pay taxes on 401(k) investment gains or income until you take the money out (which you can do legally and without penalty at age 59 1/2). Since you're not paying taxes on income or growth, all of your savings are working for you until you retire.
• High contribution limits: Another big plus of the 401(k) plan is that it allows employees to save and invest substantial amounts of money in a taxadvantaged account. For the 2011 tax year, the maximum contribution is $16,500, plus an additional $5,500 if you are 50 or older.
CONSIDER THE ALTERNATIVES
In other words, a 401(k) is a great way to invest for your future; a match simply makes it better. But you also should think about the alternatives:
• Traditional IRA: Anyone with the earned income can contribute up to $5,000 ($6,000 if you're at least 50) per year to an IRA. Watch out, though, because if you are what the IRS calls an "active participant" in a company- sponsored retirement plan, and your income exceeds certain limits, your contributions may not be tax-deductible. (In this case, you should instead consider investing in a brokerage account; see below.) Regardless, your money will grow tax-free until you start to make withdrawals.
You also have the benefit of being able to invest in any publicly traded security.
• Roth IRA: If your income falls within the limits (in 2011, no more than $122,000 for singles or $179,000 for married filing jointly), and you believe that you will be in a higher income tax bracket when you retire, a Roth IRA can be a great choice. Contributions are made with after-tax dollars — there's no upfront tax advantage — but withdrawals after age 59 1/2 are tax-free provided your money has been invested for at least five years. The contribution limits are the same as those for a traditional IRA, so you may view this as a supplement, rather than an alternative, to your 401(k).
• Brokerage Account: If your income precludes you from investing in a tax-deductible IRA, a traditional brokerage account can be a good alternative.
Your contributions aren't tax-deductible, but you will have the advantage of withdrawing funds held more than a year at the long-term capital gains rate (currently 15 percent) instead of the ordinary income tax rate.
WHAT TO MAKE OF ALL THIS
There is no doubt that a 401(k) company match is one of the best deals out there. Never, ever walk away from it. So, I seriously hope that your employer will be able to resume some level of matching contributions. But in the meantime, keep saving for retirement and don't give up on your company plan. Good luck!