Despite the fact that 401ks are a great benefit a lot of companies offer to employees, there are several valid reasons to not contribute to a 401k program. Even so, many individuals choose not to contribute to a 401k because they feel intimidated by retirement accounts, or contributing regularly might not be in their best financial interests long term. Most 401ks require a certain dollar amount in order to qualify for the full employer match and a monthly contribution may be hard for those already living paycheck to paycheck. Terms and conditions for 401ks can be incredibly intimidating, and the “rules” vary from plan to plan, so it is easy to see why many opt to keep dollars in their paycheck rather than save for retirement.
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Here are a few reasons why you shouldn’t contribute to your 401k:
1. You are in debt, and lots of it. If you are in debt you should be contributing every spare nickel and dime to paying off what you owe. The simple fact is that most credit cards or loans have a much higher interest rate than the 3-6% match your employer would kick in on contribution match for your 401k. If you take the extra money you’d put into a 401k and roll it into a snowball approach to your debt, you’ll come out better than if you spent those months or years putting money into a 401k plan.
For example: If I have $700 total each month to spend on my savings and debt repayment, but had to contribute $120 each month to get the employer match on my 401k contributions, it would take me 10 months to pay off my $5,000 credit card burden at 22% APR. If I bundled all of my money, I could pay off the debts in 8 months and start splitting the initial $700 between my 401k and emergency savings.
Once the debt is paid off, you’ll have even more money than if you’d been contributing to both to supercharge your retirement savings.
SEE ALSO: 11 Ways You’re Throwing Your Money Away
2. You haven’t set up your “financial house”. Yes, paying off debt is important. That should come first. Yes, retirement planning is important, and if we’ve learned anything from “The Great Recession” it is that we need to plan for the future. This should also include your short term future as well. Do you have savings to weather any unforeseen circumstances that might affect you or your family?
I’m talking about an emergency fund, and if you do not have one—get one. An emergency fund should be between 3-6 months of living expenses should you find yourself without a job, a medical emergency, or a big fix on your home, cars, kids, etc. Saving up that much money and not spending it may seem like a counterproductive idea, but planning for the unexpected is a great way to keep your finances on track, since you’ll never have to be derailed by a large budget-busting emergency.
3. You have other financial priorities. You can always take money out of a 401k if you need it, since it is after all, your money in your own account. Beware of doing this though, as the money gets taxed and is hit with hefty early withdrawal penalty fees. If you have other financial priorities, such as debt (see above) or wanting to save for a down payment on a house or to save for a child’s college education, it is better to put these monies into a regular savings account and halt 401k contributions, if necessary.
A home can be the single greatest financial asset a person can obtain. Aside from that, homes can also build wealth. If you pay off your mortgage early you can live in the home and not have to worry about making a house payment. Any of those extra funds could be used for a 401k or IRA plan down the road.
Keep in mind that if you are thinking of leaving the company in a few years and have not purchased your first home, you may be losing money by putting it into the 401k since you will not be eligible for the match money if you leave before you are fully vested.
4. You do not get any employer match. Whomp. Big Whomp. The whole argument and push for employees to participate in a 401k is because they get additional “free” money in matching contributions from their employers. It is a nice option for companies to offer a 401k plan, but the company match is really the incentive to put your money into a 401k in the first place. You should still be planning for retirement, but if we are being truthful, there are better options available if you are one the unfortunate few who have an employer who does not match funds.
As we stated above, 401ks often come with nasty penalty fees if you withdraw, but there are also fees associated with plan upkeep. Since 401ks often have such limited fund selection, there are other awesome options available, like a Roth or Traditional IRA.
Unlike a Roth IRA, which you can borrow from tax-free to make a down payment on a home, a 401k is still subject to up to 10% penalty tax. In fact, a Roth IRA offers a lot more flexible options for contributions and withdrawals. A Roth IRA allows money to be withdrawn tax-free when you reach age 59 ½, but although the contribution limits are lower you can contribute to both a Roth and a 401k if fall within the regular income limits for a Roth IRA.
It is easy to make a compelling argument either for or against participating in an employer sponsored 401k program. As you can see it really depends on each individual and their circumstances. The bottom line is still the same: planning for retirement needs to start as early as possible, whether you use a 401k, or other method available.
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