No 401k match, now what?

[claudius753]

My employer just announced that they have suspended the match on any contribution that I make into my 401k retirement plan. The whole draw to the 401k, for me, was the fact that they matched 25% of my money, plus an extra discretionary match at the end of the year, usually another 25%. Basically an instant 50% return on my money, not to mention the tax savings.

Now that they have suspended that, at least for this year, what is the best course of action? I am basically considering 3 options.

1. Don't do anything, just keep contributing at the rate I do now.

2. Increase the amount that I contribute by 50% to make up for the lost match

3. Stop all contribution, and instead open a Roth IRA, contributing the same amount post tax that I was previously contributing to the 401k pre-tax.

It seems to me that if I am losing the "free" money from my company, that the tax savings a Roth would offer in the long run (at retirement) would outweigh the tax savings today that a 401k offer.

[Goldy1]

My husband contributed about 20% of his pay for about 5 years with no match. It helped on taxes. It totally sucked to lose that contribution b/c it is a pay cut essentially. IT sucked even more when the market crashed but we don't regret it b/c we are longterm investors. WE put some money in roths too, an dbuy bonds from gov. Who knows if tax rules on roths will change later. WE just chose not to worry too much about it b/c even w/o a match it wasn' tlike we were wasting the money.

[atomicrc11]

I would say it depends on how diligent you will be in savings the money. If you feel you will be able to put the money in a Roth, then go for it. If you might spend the money before you invest it, then stay with the 401k since it automatically comes out of your pay check.

[jIM_Ohio]

what is your gross income, taxable income and tax liability from 2008 tax return (filed before april 2009)?

[Uneventoast]

My advice is don't invest in your 401K...invest that money in an IRA and then if you have money after maxing out go see a professional financial adviser. If you can afford to put 50% of your income into your 401K then you need to look for professional advice on what you should be doing with your investments.

[Tree0164]

How about continuing contributing what you were getting and then take 50% that you mention in optin 2 to be in a Roth.

Many companies are discontinuing the match... but I still think 401k are a great way to save because it is taken out first and it lowers the tax libality today.

[jIM_Ohio]

Originally Posted by Tree0164

How about continuing contributing what you were getting and then take 50% that you mention in optin 2 to be in a Roth.

Many companies are discontinuing the match... but I still think 401k are a great way to save because it is taken out first and it lowers the tax libality today.

I agree with some of this.

Big issue is whether the tax savings lowers which bracket you pay taxes in, IMO.

[TBH]

What if the company does better than expected and they decide to do that discretionary 25% match at the end of the year? If you stop contributing now, you'd miss out.

I like Tree's suggestion--keep contributing the same amount to the 401k, and put the additional 50% of contributions that you used to get from the company into a Roth IRA. Gives you a diversified tax strategy, and your real savings rate won't have gone down with the company match being taken away. Also, you're reducing the amount of your income that you actually live on. Always a good thing.

Do you think this sign of distress from your employer is a precursor to more painful cuts? Do you have a hefty emergency fund in case of layoff? Just a thought.

[sweeps]

Originally Posted by TBH

What if the company does better than expected and they decide to do that discretionary 25% match at the end of the year? If you stop contributing now, you'd miss out.

This is a great point. A few years ago my company made an unexpected bonus match at the end of the year. If you hadn't contributed at all, you were out of luck.

[Slug]

Originally Posted by jIM_Ohio

I agree with some of this.

Big issue is whether the tax savings lowers which bracket you pay taxes in, IMO.

This is the most important point so I'm quoting it. If it won't affect your tax bracket, then I'd take the money and max the Roth then go back to the 401k to fund it. If it does affect your bracket, then put just enough in the 401k to put you in the better bracket, and as you're doing so use the overage to fund a Roth with any overage to that going into the 401k once the Roth is maxed. That would be the most efficient approach.

To the what if things get better and they offer a discretionary match, that's worth a follow up email to your employer to see if such a chance truly exists. If it did, one would think any ethical employer would provide that information up front.

[sweeps]

I think the tax bracket argument is misleading. If the tax rate on your entire income could be lowered by moving to a lower bracket, that would probably be a big win. But as you know, it doesn't. It sounds better than it is: "lowering your tax bracket". Just because I may be able to lower my tax bracket this year doesn't mean I couldn't save more in taxes later by funding a Roth instead. Why? Because the difference between the current effective tax rate and the effective tax rate at withdrawal time is what is really important.

And speaking of effective tax rates, eligibility for deductions and credits can play a big role.

[jIM_Ohio]

Sweeps- if 401k moves someone from one bracket to a lower one, then the Roth is funded at lower level, there is significant savings. Not misleading at all- need more info to make a good recomendation.

I also agree on 401k being used to get eligibility for credits and deductions.

[claudius753]

I haven't done my taxes yet as I am waiting to get all of my forms still. My pre-tax income is about $27,000 so I don't know what tax bracket I am in and if it would be affected.

I do expect to get a refund of probably $1200 - $1500 as I did last year. I know, I should change my withholding so that I take home the extra $100 or so per month, but I am always scared to what I should change it to.

I think I will take the bulk of the tax refund to start the Roth whether or not I stop contributing to the 401k. Now just seems like a great time to buy. I don't think I can swing putting in enough each month to hit the Roth max anytime soon, I take a full time load of college courses as well as the full time job, and I am trying to keep the student loans to an absolute minimum.

Does anyone have a specific company they would recommend for the Roth? I like T Rowe price since I can fund with as low as $50 per month. I also have a Sharebuilder account that I was playing with for a while ($500 went to $700 then crashed to $350) so I can also get a Roth with them.

As for my job, I don't think I am in a position where I would lose my job, they just hired another person to help me so the work load is there and it's not really a job that can be phased out. I am working on shoring up my emergency fund, which is where the other part of my refund will go.

Thanks for the advice,

Nathan

[jIM_Ohio]

At your income level (15% tax bracket), the Roth is better deal than the 401k. Can you max out the Roth ($5k) if you stop the 401k.

If you were investing 6k per year before, consider putting 5k into Roth and 1k into the 401k. Meaning max Roth, then use 401k for the rest.

You can google or yahoo search paycheck calculators, look for the one from paycheck city (that is who I use) and go from there. It is real accurate. Almost to the penny.

Last year we modified our withholding when kids were born. Our refund for 2008 will be about $1900. I did not know about the $1000 per kid child tax credit when I did that calculation, so I would have owed $100 had the credit been taken away.

[creditcardfree]

I agree with Jim! Fund a Roth IRA, it will be better in the long run. If the match comes back...consider going back to the 401K to get the match.

There is a tax withholding calculator at irs.gov that will give you a recommendation about the amount to withhold. Good luck.

[TBH]

Originally Posted by jIM_Ohio

If you were investing 6k per year before, consider putting 5k into Roth and 1k into the 401k. Meaning max Roth, then use 401k for the rest.

I would be shocked if he was investing $6K per year on a $27K salary when he is also paying college tuition. It would be very hard to max the Roth on a $27K salary.

[pgtr]

#3 is your best bet but #2 does point in the right direction.

Ultimately you want to max out both the 401k and Roth IRAs.

General rule of thumb as to prioritizing investments are as follows:

#1 Contribute to 401k up to amount employer matches

#2 Max out Roth IRA

#3 Max out 401k

#4 Contribute to taxable investments

Good luck!

[lennygaudy]

Hi everyone,

This is a very interesting thread. I'm not financially saavy at all which is why I joined this forum to start educating myself. That said, I'm wondering if this would also apply to my situation. I'm not sure what my tax bracket is but I made a little over 70k last year. I only recently joined my 401k (late October 2008) and my employer does not match. Would this Roth thing make more sense in my case too?

I've never heard of Roth's before so if it does than I'll definitely have some research to do. Right now I'm contributing only 3% and I won't be able to increase that for at least one year because I'm in the midst of rigorously trying to pay down a ridiculous amount of debt and how to build an EF as well for security. So theres no way i could max either the 401k or Roth right now but if I stick to my plan I'll be virtually debt free within a year's time so I should start researching the Roth thing so Im ready when the time comes.

Thanks in advance!

[jIM_Ohio]

Originally Posted by lennygaudy

Hi everyone,

This is a very interesting thread. I'm not financially saavy at all which is why I joined this forum to start educating myself. That said, I'm wondering if this would also apply to my situation. I'm not sure what my tax bracket is but I made a little over 70k last year. I only recently joined my 401k (late October 2008) and my employer does not match. Would this Roth thing make more sense in my case too?

I've never heard of Roth's before so if it does than I'll definitely have some research to do. Right now I'm contributing only 3% and I won't be able to increase that for at least one year because I'm in the midst of rigorously trying to pay down a ridiculous amount of debt and how to build an EF as well for security. So theres no way i could max either the 401k or Roth right now but if I stick to my plan I'll be virtually debt free within a year's time so I should start researching the Roth thing so Im ready when the time comes.

Thanks in advance!

do you file as single, married or something else? What was your taxable income on your most recent tax return?

[sweeps]

Lenny: There is some disagreement here about whether a 401k or a Roth IRA should be your primary investing tool. First, let me say that investing as much as you can in either one is WAY BETTER than doing nothing. Don't delay investing in one or the other because of quibbles about which one will do marginally better in the long run.

Now that is out of the way, there are several factors to consider when making a (pre-tax) 401k vs. Roth decision.
1. Do you make too much to put money in a Roth IRA? If so, your answer is clear. Choose the 401k.
2. Does your company match contributions? If the answer is yes, then this is almost certainly a win for choosing the 401k first -- at least to the max % that your company matches.
3. Do the funds available in your 401k suck? (Poor performance, high expenses, etc.) If so, then you probably want to choose a Roth IRA -- you have a virtually unlimited choice of funds by choosing that route.
4. Do you expect your tax rates to be much higher at withdrawal time than they are now? If so, you'll probably want to choose a Roth IRA -- that lets you pay taxes now and withdraw your earnings later on tax-free. On the other hand, if you don't expect your tax rate to be higher in the future, then a 401k is probably your choice. (Note that predicting future tax rates is a tricky, if not impossible, task.)
5. (This one is important to me.) Contributing to your 401k is EASY. You basically put it on autopilot and don't even think about it. Managing your Roth IRA, while not terribly difficult either, does require more thought as to how it's going to be funded and when.
6. Do you want more control over your investments, for example, buying and selling ETFs, day trading, etc.? You'll need to choose the IRA. (Note that this is a negative in my opinion. If you want to day trade, then do it with play money outside of your retirement account. But to each his own.)
7. There are other factors that come into play as well, as far as required distributions and estate planning issues. These issues can be complex... I don't really want to go into them here, but these could be important to you. Do some research to learn more.