401(k) question

[nadia105]

My Dh had a nice 401(k) plan through his employer and we have contributed up to the point of the match (they matched 50% up to 7%) since we signed up. Last month, however, his company took away the match along with a percentage of salary and other things -- should we still contribute? We are 27, so there is lots of time before retirement, but we are watching the balance fall as soon as money goes in and we no longer have the 50% return on our contributions to soften the blow that we had with the match.

Any suggestions?

[Denvergirlie]

My question would be, do you have any consumer debt aside from a mortage?

If you have consumer debt, things like credit cards, car loans, student loans, medical bills, etc.... then I would stop the contributions and attack the debt.

If you don't have any debt then that is a different consideration.

Some see this as an opportunity to buy while stocks are "on sale".

However, you are going to need to assess you personal risk assessment. You can always switch to saving for the time being instead of investing.

[nadia105]

Thanks for the input

We have no consumer debt besides our mortgage (except for a couple appliances on 0% that will be paid in full before the promotion is up).

The 'on sale' stock factor is nice, but so would $300 extra to throw in savings.

[kirstenb]

If my employer didn't match my contributions I would put money in a Roth IRA instead of the 401(k).

If you want to save extra maybe put have in a Roth or 401(k) and the other half into a savings account.

[rebeccalynn]

You mentioned it being nice to chuck the extra $300 into savings. If you do not have 6 months worth of expenses in accessible savings, that would be my goal before retirement savings. If you have 6months savings, then I would put the up to the max ($5k per spouse x 2 = $10K) into a Roth IRA first and then put any additional/remaining retirement savings into the 401K.

[nadia105]

We don't have 6 months of savings right now, we have $100o in an emergency fund and another $8500 of student loan money we could use in an emergency (we have that for a year coming up when DH will be making just $20K for the year -- internship for seminary)

[Denvergirlie]

Oh, then I too would revise my advice to saving an emergency fund.

[SeekingJoy]

Fully fund your emergency fund with at least 6 months. We have closer to 1 yr. With your DH's employer unsteady enough to drop its 401k contributions and cut salary, I would feel better with more accessible savings than in a 401k.

[kirstenb]

Given that you don't have much of an EF I would get that in line first, then start contributing again to retirement.

[Jadzia]

Don't forget that a 401k offers a very nice tax deduction. It reduces your taxable earnings.

Say you are in the 25% federal tax bracket. If you contribute $4000 a year to the plan, you'll save $1000 in income taxes, possibly more including state tax.

[Sk8ermaiden]

Originally Posted by kirstenb

If my employer didn't match my contributions I would put money in a Roth IRA instead of the 401(k).

That.

But I would fund the emergency fund first.

And do the math yourself with what you would contribute. Usually the tax break you get on the 401K is not anywhere near the benefit of not having to pay taxes on the money you take out of your Roth IRA at retirement. That money grows tax free! It is awesome (we are excited about starting a Roth IRA in addition to our 401K next year).

[rebeccalynn]

Originally Posted by Jadzia

Don't forget that a 401k offers a very nice tax deduction. It reduces your taxable earnings.

Say you are in the 25% federal tax bracket. If you contribute $4000 a year to the plan, you'll save $1000 in income taxes, possibly more including state tax.

I still suggest putting this money into savings vs retirement until a decent size emergency savings is in the bank. After that, I would still suggest a Roth over a 401k. It is true that this would increase your taxable income by $300 x 12 months == $3600, but it sounds like they are in the lower tax bracket right now (20K for the next year). So there are no surprises come April 15th, it is always good to "spot check" your taxes whenever there are any changes to income, deductions, retirement, etc. Roth IRAs are great for a lot of people because you pay the tax on the initial investment and then everything that you earn is tax free. If you are young (ie have a long time for your money to grow) and/or are expecting a higher level of income as you progress in your career, then Roth IRAs are a good way to go when you are not receiving an automatic return on your money via a company match. I like the idea of not having to pay tax on my Roth withdraws when I am retirement age.

[nadia105]

Thanks for all of the advice.

We aren't at the $20K year yet, that is probably 2 years away, but I want to be prepared with adequate savings when we get there.

I don't know if the tax liability would change a lot for us, we have our allowances set so that no federal taxes are taken out and we still had a refund of $3600 this year.

I think we will suspend for now, having such a small amount in the EF doesn't thrill me. Dh works in shipping, for one of the two big companies, so his job is pretty stable -- the cuts were 'preemptive' because profits weren't as big as expected.