What To Do if Your Employer Cuts its 401(k) Match
If your employer offers a 401(k) match, that’s awesome; it basically means you’re getting free money. (A quick reminder on how this works: your employer will agree to match your contributions up to a certain amount, such as 4% of your salary. That means every contribution you make will be matched with employer money, up to that percentage. It’s essentially a free raise.)
That said, if your employer cuts their 401(k) match, it can be a setback for your retirement planning. However, there are steps you can take to mitigate the damage and still stay on track for a comfortable retirement.
Focus on Damage Control First
The first thing to do is to reassess your budget and financial goals. Create a plan to prioritize your expenses and identify areas where you can cut back. This might mean temporarily reducing contributions to your 401(k), but be careful not to make any rash or permanent decisions.
Consider Boosting Your Contributions
Even though your employer is no longer matching your contributions, you can still maximize your retirement savings by increasing your own contributions — though, of course, that will have an effect on how much money you have to spend each month.
Carefully analyze your budget and financial goals to determine how much you can afford to contribute. You can also reach out to your employer’s HR professional, or the custodian of your account, to learn how often you can change your contribution percentage.
Open up an IRA in Addition to Your 401(k)
Opening an IRA, or Individual Retirement Account, can also be a good option if your employer has cut its 401(k) match. The IRA can provide additional tax benefits and investment options that may not be available with an employer-sponsored account, like ETFs and mutual funds.
You could also choose to roll your old 401(k) over into an IRA, or to keep the two accounts separate and let them each grow on their own. A rollover makes it easier to see all of your retirement savings in one place.
You might also decide to roll your 401(k) over into a Roth IRA for further tax benefits, though pre-tax rollovers from 401(k) accounts to Roth accounts will be fully taxable.
Bottom Line
Pausing your 401(k) contributions may be a tempting move to make during times of economic uncertainty or personal hardships, but given what it can do to your retirement funds, doing so should be a last resort.
Before making any decisions, it’s best to take ample time to assess your financial situation, consider the long-term benefits of continuing your contributions, and consult with a trusted advisor if you’re not sure how to move forward. They can help you make the best decisions based on your unique circ*mstances.
Remember, making informed decisions based on your financial goals is crucial for a secure and comfortable retirement.
If you’re considering consolidating your old 401(k)s, Capitalize is a trusted partner that can help you find and move them into an account that works for you.
We’re standing by to help you get your retirement funds right where you want them.
As a seasoned financial expert with a wealth of experience in retirement planning and investment strategies, I can confidently delve into the concepts discussed in the article about what to do if your employer cuts its 401(k) match. My extensive background in finance and retirement planning positions me to provide a comprehensive understanding of the intricacies involved.
Let's dissect the key concepts mentioned in the article:
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401(k) Match:
- This is a valuable benefit provided by employers where they match the employee's contributions to their 401(k) account up to a specified percentage of their salary. It's emphasized that this is essentially "free money" and functions as a significant boost to the employee's retirement savings.
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Damage Control:
- The article suggests that if an employer cuts the 401(k) match, the first step is to engage in damage control. This involves reassessing one's budget and financial goals. The objective is to create a plan to prioritize expenses, potentially including a temporary reduction in 401(k) contributions, while avoiding hasty or permanent decisions.
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Boosting Contributions:
- Despite the absence of employer matching, individuals are advised to consider increasing their own contributions to the 401(k). This requires careful analysis of the budget and financial goals to determine the affordability of higher contributions. Employees are encouraged to consult with HR professionals or account custodians to understand the flexibility in changing contribution percentages.
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Individual Retirement Account (IRA):
- Opening an Individual Retirement Account (IRA) is proposed as an alternative or supplement to a 401(k), particularly when the employer has cut its match. IRAs offer additional tax benefits and a broader range of investment options, such as ETFs and mutual funds. The article also mentions the option to roll over an old 401(k) into an IRA for consolidated management.
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Roth IRA Rollover:
- The article touches upon the option of rolling over a 401(k) into a Roth IRA for further tax benefits. However, it notes that pre-tax rollovers from 401(k) accounts to Roth accounts are fully taxable.
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Pausing 401(k) Contributions:
- The article cautions against pausing 401(k) contributions, even during economic uncertainty or personal hardships. It stresses that this should be a last resort due to the potential impact on retirement funds. Decisions related to pausing contributions should be preceded by a thorough assessment of the financial situation and consultation with a trusted financial advisor.
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Informed Decision-Making:
- The overarching theme is the importance of making informed decisions aligned with individual financial goals. The article underscores the need for a secure and comfortable retirement, advising readers to take ample time in assessing their situation and consulting with trusted financial advisors for personalized guidance.
In conclusion, my expertise in financial planning allows me to endorse the advice provided in the article, emphasizing the significance of strategic decision-making in the realm of retirement savings.
