4 Times When A 401(k) Plan May Not Make Sense

There’s an exception to every rule. Take employer-sponsored 401(k) retirement plans.

Most times, it’s a good idea to contribute to a 401(k). These employee-sponsored, tax-advantaged savings plans let workers invest a portion of their paychecks before the money hits their bank accounts.

And who couldn’t use a little tax help from Uncle Sam?

But in a handful of situations, those contributions may not make sense, says JJ Montanaro, a CERTIFIED FINANCIAL PLANNER™ with USAA.

Here are four of them:

• When you have debts with high interest rates. A profitable 401(k) is unlikely to earn enough to counter a 20% (or higher) interest rate. Pay off those crippling debts first.

• If you haven’t established an emergency fund. “Build a solid foundation before you start contributing to your 401(k),” Montanaro says. “You may not need the full three to six months’ worth of expenses set aside in your emergency fund, but you ought to have a nice start — say $1,000.” You don’t want to dip into your 401(k) early to cover an emergency; there are stiff penalties for early withdrawal, and your access to this retirement money may be limited.

• If your employer’s plan doesn’t measure up. High fees, few investment options and the lack of an employer match for your contributions could make a traditional or Roth individual retirement account (IRA) more attractive than your company’s 401(k).

• If there’s no Roth option. The tax-free potential of a Roth can make it a smart option for anyone who anticipates paying higher taxes in the future — typically younger investors. If your 401(k) doesn’t offer a Roth option, a Roth IRA could make more sense. But don’t give up the company match money. Contribute enough to your work 401(k) to get the entire match and then put any additional retirement savings in a Roth IRA.

Despite a few unusual situations, Montanaro says a 401(k) is still one of the easiest ways to save for retirement because it’s handled via payroll deduction.

“Remember, pay yourself first,” Montanaro says. “The biggest thing is to find a way to save.”

“So often I hear, ‘I’m going to work forever. That’s my plan,’” he adds. “But you need to find a way to build some cushion into that plan.”

The USAAVoice Team is committed to providing information that helps to facilitate the financial security of the military community. The advice in our content is grounded in the principles of sound money management and covers a range of topics, including personal finance, retirement, investments, auto, home, life, health and other areas relevant to our business and the audience we serve.