Maxing out contributions to your company’s 401(k) plan is almost always a good idea. After all, when you contribute to a traditional 401(k) plan, your current tax bill is lowered. You aren’t taxed on contributions until the money is withdrawn in retirement, allowing your investments to compound tax-free until then. And if your employer matches a percentage of your contributions, you get an immediate return on investment. These are all good reasons to make regular contributions your 401(k) plan.
However, there are some personal situations where forgoing 401(k) contributions, at least for a little while, is the more prudent choice. Consider these three scenarios:
The rule of thumb is to have enough cash readily available to cover six months of expenses. Otherwise, unexpected events such as job losses, medical emergencies, or personal crises may force you into excessive debt. You may find yourself paying off high-interest credit cards or personal loans long after the misfortune is over, which will set you back in your plans to save for retirement. So, before maxing out 401(k) contributions, set aside enough money from each paycheck to protect yourself with an emergency fund.
A few hundred dollars on credit cards is no big deal. But high-interest balances of several thousand or tens of thousands of dollars may be cause for concern. It’s usually better to pay off some or all of those consumer debt balances before contributing extra to a 401(k).
Any matching contribution your company offers should be considered free money. But beyond the company match, survey other places to park your retirement money such as a Roth IRA or indexed mutual fund. Your company may offer funds invested in large-cap American companies exclusively. To diversify your portfolio, you can consider looking outside your firm’s 401(k) plan for additional investment choices, such as emerging market or international funds that may garner higher returns over time. Visit Alloy Silverstein Financial Services, Inc.’s website to learn more about customized retirement and investment planning.
Bottom line? Save regularly for retirement, but take a hard look at your overall financial situation before maxing out contributions to your company’s 401(k) plan.
For guidance, turn to Alloy Silverstein’s professionals.
© MC 2017 | “Financial Tips” are published monthly to provide useful financial information. The information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance. Visit www.asfinancialservices.com for more information on managing your finances with a sound financial plan.
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