What to do? Employer stopped 401(k) match

[mdm85]

DH's employer used to match 5% of his 401(k) contribution, which is what we contributed. Now that they have stopped the match I'm wondering if it's even worth contributing at all.

All we have now is money in retirement accounts and an emergency fund in a savings account. I'm wondering if we should take the money we would normally put in the 401(k) and start a non-retirement stock portfolio. I just hate to lose the "momentum" on the 401(k), you know? (The current balance is 20k.)

What do you think?



We are 26 and currently have:

20k savings account
30k Roth IRA (we max this out every year)
20k H's 401(k)
6k IRA
2k my 401(k) I just started a new job

 

[pb4uski]

A lot of the punch of the 401k is avoiding taxes at higher marginal tax rates while you are working but paying taxes on withdrawals in retirement at lower marginal rates, so to some degree it depends on what your marginal tax rate now is.

Another factor to consider on the 401k is the investment choices available and their cost.

If the investment choices are reasonably good and the expense ratios are reasonable then continued 401k contributions might still make sense. If not, then investments to a taxable account might be better.

 

[growing_older]

Your best options depend on what investments are available in the 401k, as well as your plans to stay with this employer or not. While a match is great (who doesn't love free money) there is also a significant benefit of an immediate tax deduction and long term sheltering of gains. When my employer switched to a company with high fee funds and dropped the match for a few years, I found it was still best to get the tax deduction. Then later when I switched employers I was able to move the 401k to an IRA with better investment choices.

Long term, you might also consider increasing your contribution rate above 5%, depending on what other obligations and goals you have. You cannot get back any tax advantage space you leave unused for the year, so try to take advantage when you can.

 

[rescueme]

Long term, you might also consider increasing your contribution rate above 5%, depending on what other obligations and goals you have.

I would agree.

"Back in the day" (when still employed), I contributed above the line in my 401(k).

That means that I contributed much more than the employer's match, and even contributed above the federal annual limit (e.g. my contributions were taxable, at that point).

At the same time, DW/me also contributed to our respective IRA's.

It wound up that we contributed a bit more than 33% of our combined gross income (for many years) toward our retirement.

While it's fine to get the employer's match, it's more important to prepare for your eventual future of retirement. You can't do it just based upon your employer's "free money".

Just my opinion...

 

[JOHNNIE36]

Back in my days with the company and the 401k, I still think the deferred income tax was the big draw to the investment. I can't remember when it went into effect but for years the company then contributed dollar for dollar. The maximum match was on 10% of your salary. I could contribute another 5% but it had no company contributions. That was a total of 15% with deferred income tax. That was a good deal. I still remember borrowing money from my folks toward the end of the years if I had not maxed out the contribution. Did that four or five times.

Then over the years the company contributions dwindled and it was $.25 on the dollar when I retired. Still all those years it was a great deal. Remember, you are still investing and will continue to invest whether through your company or someone else. Depends upon your investment options.

 

[LOL!]

What to do? Easy: Increase contribution to maximum allowed per year: $17,000 in 2012.

 

[Alan]

I also like the attraction of tax deferrals with 401k's so unless the choices are awful I would continue to contribute.

You say you have no after tax savings other than an emergency savings account. What other savings goals do you have? e.g. replacement cars, vacations, etc.

 

[teejayevans]

How good is your 401K? How expensive is it, 401Ks must now tell you their fees. How about funds available? What's your tax bracket now? What will your tax bracket be when you retire?
Without answers to these questions, you might as well flip a coin.
TJ

 

[Animorph]

Mostly a tax question. However, you are already maxing out a Roth IRA, the main competitor to a traditional 401k. Your 401k is very likely to be a better spot for your portfolio than a taxable account. Unless you are paying nearly zero taxes, I'd keep going as you are, and probably try to compensate a bit by saving more in the 401k if you can and the options are acceptable. That's a definite pay cut. Hopefully it's temporary.

 

[martyb]

I've been contributing to my 401k (TSP) for years and have never gotten any match. I fall under an older retirement system with the fed govt. that isn't eligible for any employer matching. That doesn't stop me from maxing to the IRS limits my contributions (currently $22500 per yr.). I'm up by $40,000 since January 2nd of this year as of this past Friday, and I've been able to tax-defer $22,500 of my income. No complaining here!

Current annual contribution limits per the IRS are $17000 and an additional $5500 if you are age 50 or older. I highly advise shooting for these limits.

 

[Tyro]

DW's employer never matched contributions, and everything we've ever read or been advised by tax accountants has been to contribute the max (or as much as possible) every year, and take advantage of any/all catch-ups. It has not only deferred taxes on the contributions and accumulated growth, it's lowered our current taxes every year.

I'll defer to the experts here, but it would seem expenses/fees would have to be obscene not to take advantage of a 401K.

Tyro

 

[plex]

The one other thing to take note of, is that there are only two reasons your employer would do this. Either the employer is in (hopefully temporary) trouble and had to find a large cost to cut, or the corporate environment has changed to the point where they do not care much about retaining employees.

Either way, this is a bad signal, though it should be viewed in light of the whole situation, but if it is indicative of a trend, maybe you should keep an eye out for a good lateral opportunity in the area.

 

[Texas Proud]

Mostly a tax question. However, you are already maxing out a Roth IRA, the main competitor to a traditional 401k. Your 401k is very likely to be a better spot for your portfolio than a taxable account. Unless you are paying nearly zero taxes, I'd keep going as you are, and probably try to compensate a bit by saving more in the 401k if you can and the options are acceptable. That's a definite pay cut. Hopefully it's temporary.

I disagree only on when to pay..... I would not put any money into a 401(k) if I were only saving 15%.... I think that the tax laws will continue to have cap gains and dividends at low (or lower... or even zero for lower earners) rates... I also think that ordinary income will have higher rates.... you will eventually have to pay ordinary income taxes on the money and I bet it will be at a higher than 15% rate.....

 

[Buckeye]

The one other thing to take note of, is that there are only two reasons your employer would do this. Either the employer is in (hopefully temporary) trouble and had to find a large cost to cut, or the corporate environment has changed to the point where they do not care much about retaining employees.

Either way, this is a bad signal, though it should be viewed in light of the whole situation, but if it is indicative of a trend, maybe you should keep an eye out for a good lateral opportunity in the area.

Make sure you have a very robust safety fund to cover both situations!

 

[RunningBum]

A year or two ago I heard from people who were lamenting how they maxed out their 401Ks for years, and in retirement found that RMDs were putting them in a higher tax bracket than they were in for their working years. I wouldn't add to the 401K if you are in the 15% bracket. 25%, I'd probably stay with the 401K or maybe some of each.

 

[growing_older]

If possible to engineer a soft glide into RMDs that keep taxes down, that would be great. But if I miscalculate and end up with more income than I want, I'll be glad my account did so well and find a way to console myself at having too much money. There are worse problems to have.

 

[nun]

A year or two ago I heard from people who were lamenting how they maxed out their 401Ks for years, and in retirement found that RMDs were putting them in a higher tax bracket than they were in for their working years. I wouldn't add to the 401K if you are in the 15% bracket. 25%, I'd probably stay with the 401K or maybe some of each.

Some people complain about the strangest things.

To the OP. Whether you continue with the 401k depends on your current tax bracket and what you believe you will be paying in tax in retirement. of course that needs knowledge of the future, so I would probably keep putting into the 401k to make use of the immediate advantages of tax deferral, tax free growth and force saving.

I'd also look for a new job with a 401k match.

 

[RunningBum]

Some people complain about the strangest things.

I think it was just a matter that the got blind advice to invest as much as possible in their 401K, period. As it turned out, that wasn't optimal advice, tax-wise, though it could just be that no one expected the big run-up in the 90s. In E-R.org, better advice is usually given to consider the bracket you are in now vs. your anticipated retirement bracket, and not defer into a higher tax bracket. It is very true that there is a lot of uncertainty with future brackets, but I predict there will be a lot more volatility in the top brackets rather than the 15% bracket.

 

[nun]

I think it was just a matter that the got blind advice to invest as much as possible in their 401K, period. As it turned out, that wasn't optimal advice, tax-wise, though it could just be that no one expected the big run-up in the 90s. In E-R.org, better advice is usually given to consider the bracket you are in now vs. your anticipated retirement bracket, and not defer into a higher tax bracket. It is very true that there is a lot of uncertainty with future brackets, but I predict there will be a lot more volatility in the top brackets rather than the 15% bracket.

To know if the 401k was a bad idea we'd have to factor in things like whether the tax free compounding of the gains was less or more than the extra tax because of RMD. Going up a tax bracket in retirement is a good problem to have, perhaps not optimal, but certainly nothing to complain about. The people who are complaining about this had options to avoid the high tax bill.......they could do what many of us on here will do; ER so we can spend down 401ks and do ROTH conversions and defer SS until we are 70.

I would advise the use of 401ks to defer tax on income and gains, but their true potential is only gained with a sensible retirement tax strategy. Also if you LBYM 401ks are generally a good idea as your need for income is less than you earn so when you ER you will automatically be paying much less tax. The wrinkle come in with RMDs though.

 

[Bimmerbill]

This is my first year of maxing out my 401k. What got me to try it was the fact that I don't get to claim DD this year and as a single person making decent money I was afraid of the tax bill. And, I wanted to make up the payout to my former spouse.

I wish I had done it earlier. I plan on doing it next year too.

 

[rescueme]

If possible to engineer a soft glide into RMDs that keep taxes down, that would be great. But if I miscalculate and end up with more income than I want, I'll be glad my account did so well and find a way to console myself at having too much money. There are worse problems to have.

I agree.

And the problem is not necessarily RMD's, but "excess RMD's"- that is the extra amount you have to withdraw based upon the age calculation, rather than the mimimum what you need to live on and supplement your other income sources.

There are ways around this if you want to consider them.

- Purchase an SPIA with TIRA funds. That will reduce your excess RMD's, since SPIA's are considered payable over your lifetime.

- Delay SS and use your TIRA's for income during the delay period. That will also reduce your portfolio quicker.

And if you have extra? Sure, you have taxes to pay (whatever they are, since you didn't pay them up till that point), but you also have the chance to re-invest and take advantage of (possible) taxable account capital gains/loss rules - something you don't have with an TIRA.

I don't see it as a problem IMHO and as you said, if you have more income than you planned for it's a good "problem" to have...

 

[RunningBum]

Yes, it's a "good problem" to have if it's because your 401K did better than expected. But someone might do better by investing in a taxable account, taking dividends and LTCGs at 15% and having no tax burden on the lump sum except for any unrealized cap gains. If you defer income at 15% only to later pay 25% or more on some of it in retirement, you'll have to save more to account for it. Still a good problem? Not the way I see it. And if you didn't account for it, your plan may break having to pay higher taxes that expected in retirement.

An SPIA is a good idea but aren't the expenses fairly high for those?

With a taxable account, you will probably have lower expenses, certainly more choices than in a 401K, and more flexibility with the money--no RMDs, use it at any time (which can be good or bad).

And this is why people ask what your tax bracket is now, and what you expect it to be in retirement. The only no-brainer in favor of the 401K is to get the company match. After that it's worth doing some math.

 

[bssc]

That happened to us in 2009. I didn't change a thing so add me to that list.

 

[rescueme]

An SPIA is a good idea but aren't the expenses fairly high for those?

Don't confuse it with a VA (variable annuity) product. Two different products, two different fee structures.

In fact, with a SPIA there are no ongoing fees involved; however since this thread is not about SPIA's, I stop here...

 

[growing_older]

Yes, it's complicated to figure out how much 401k I can accumulate without having RMD requirements push me into a higher tax bracket. If I had $100 million in my 401k/IRA my RMD would be terrible almost no matter what I did. If I had $100,000 in there my RMD are probably not a problem no matter how I deal with it. But somewhere in the middle I risk being pushed into a higher bracket I could have avoided if I saved money as taxable and gave up on some of the deferral. Oh well. It's impossible to calculate without knowing future investment gains and future tax rates, so I just approximate and take a good guess.

My safety valve is ER, because if I have enough retired years before I need to take RMDs, I can siphon some of that tIRA into a Roth while I'm not working (and have a lower tax rate) and by the time I need to RMD my account will be smaller. At least that's my current plan.