If someone offered you free money, would you say no? Probably not. It may not seem like it now, but that's exactly what you're doing if you don't contribute to your 401(k). There are several benefits to a 401(k) plan, which we will review, and every financial planner will tell you to invest in one form of retirement account. So, instead, let’s cover an issue you are less likely to discuss—when you should stop contributing to your 401(k).
Before we get there, it's worth taking a look at why you’re participating in a 401(k) plan in the first place. Here we cover a few of the best perks, in order to help guide your contribution decisions.
Key Takeaways
- 401(k)s provide two separate tax breaks: You get a tax deduction for contributions, and your money grows untaxed until you take withdrawals.
- Many employers will match at least a portion of your 401(k) contributions, and that’s more or less “free” money.
- The tax-free growth and those extra employer contributions will stall when and if you stop contributing more money to your 401(k).
- Most experts recommend contributing to your 401(k) for at least as long as you’re working.
Tax Breaks
You get two tax breaks when you save in a 401(k) plan. First, the money you contribute is tax-deductible, meaning that what you contribute to a 401(k) this year will not be taxed as income this year. You will not pay taxes on the funds contributed until you withdraw the funds, typically in retirement. Your savings grow faster because they are tax-deferred. Your 401(k) enjoys compound growth untouched by the taxman until you retire and begin withdrawing the money.
Saving Made Easy
Investing in your 401(k) is “paying yourself first” because it ensures that you are supporting your future wealth. Steady saving is one tactic that millionaires employ. It’s also an easy way to save since your employer deducts your 401(k) contributions automatically from your paycheck so you won’t need to remind yourself to write a check. After a while, it’s likely you won’t even notice the money missing from your paycheck.
Without a 401(k), you’d have to set up a retirement account and consciously take out your contribution every month, which, let’s be honest, won’t happen the month you take a spontaneous vacation, have to make an unexpected repair or purchase a big-ticket item.
Note
A 401(k) typically allows for much more generous savings than many other types of retirement accounts, such as a traditional or Roth IRA, which have rigid limits on the amount you are allowed to contribute annually.
The 401(k)’s “forced savings” aspect also allows you to take advantage of dollar-cost averaging. Putting it simply, you consistently use the same amount of money to buy securities over time and this tends to lower the average cost of all of your shares. The market is consistently swinging, but putting money in on a regular basis via a 401(k) allows you to purchase shares when prices are low and will likely bounce back up later on. Since 401(k) investors are contributing to every paycheck, this is the default strategy.
Employer Matching
To encourage participation, in many cases, an employer will match a portion of your 401(k) contributions. Let’s say your company matches 70% of your 401(k) contributions up to 6% of your salary. If you make $100,000 and contribute $6,000 (6%) the company will pitch in $4,200. This is a deal you'd be wise not to pass up.
Good Saving Habits
Saving today via a 401(k) gets you into the habit of living frugally.For example, if you make $80,000 and contribute 20% to your 401(k), you’re actually living on $64,000. (Just be sure to watch out for the contribution limits.)
Note
A life-long practice of putting money aside for savings will pay off in your later years by allowing you to actually enjoy your post-career life on less income, which can help make your retirement money last longer.
So what happens when you stop contributing to your 401(k)? You guessed it—most of the above benefits go away.
- No more reduction in taxable income
- No more employer contribution
- No tax deferral on your additional retirement savings
- No more paying yourself first
Stopping your contribution dramatically slows the growth of your retirement money.It may feel good now to have that extra cash in your checking account, but when it's time to retire don’t you want to have saved as much as possible?
The Bottom Line
So when is the right time to stop contributing to your 401(k)? The most lucrative answer is the day you stop working. Take full advantage of the 401(k) plan your employer offers. A program that lets you save tax-deferred and, possibly, collect free money through an employer match can put you on the path to your dream retirement.
FAQs
A general rule of thumb says it's safe to stop saving and start spending once you are debt-free, and your retirement income from Social Security, pension, retirement accounts, etc. can cover your expenses and inflation.
Should I stop my 401k right now? ›
Continue contributing to your 401(k) plan
This is when you invest a specific amount regularly. For example, you might have $100 from each paycheck contributed to your 401(k) plan. There's no reason to pause these contributions during a recession.
What is the time limit for 401k contributions? ›
The answer is that because 401(k) contributions are made through payroll deductions, Dec. 31 is the deadline. However, if you have an IRA, you can contribute to that account up until the 2023 tax year filing deadline, which is April 15, 2024.
Is it better to max out a 401k early in the year? ›
It's never too early to set up a 401(k)—but there's no real benefit in maximizing your contribution as quickly as possible when offered an employer match. By maximizing your 401(k) annual contribution at the beginning of the year, you could miss out on your employer's maximum matching contribution.
At what age does your 401k have to be depleted? ›
Required minimum distributions (RMDs) are the minimum amounts you must withdraw from your retirement accounts each year. You generally must start taking withdrawals from your traditional IRA, SEP IRA, SIMPLE IRA, and retirement plan accounts when you reach age 72 (73 if you reach age 72 after Dec. 31, 2022).
At what point should I stop contributing to my 401k? ›
A general rule of thumb says it's safe to stop saving and start spending once you are debt-free, and your retirement income from Social Security, pension, retirement accounts, etc. can cover your expenses and inflation.
Will I lose my 401k if the stock market crashes? ›
What Happens to My 401(k) If the Stock Market Crashes? If you are invested in stocks, those holdings will likely see their value fall. But if you have several years until you need your retirement account money, keep contributing, as you may be able to buy many stocks on sale.
What age is too late for 401k? ›
The Bottom Line. It's never too late to start saving for retirement. Even if you'd like to retire in 5 or 10 years and have little to nothing saved—it's still not too late.
At what age can you no longer participate in a 401k? ›
There are no set age restrictions with a 401k set by the IRS. You are allowed to make contributions to a 401k plan regardless of your age. However, you could be bound by other regulations like labor laws or age of majority rules that prevent minors from being employed full-time or signing a legal contract.
Can I contribute 100% of my salary to my 401k? ›
Elective deferrals up to 100% of compensation (“earned income” in the case of a self-employed individual) up to the annual contribution limit: $23,000 in 2024 ($22,500 in 2023; $20,500 in 2022; $19,500 in 2020 and 2021), or $30,000 in 2023 ($27,000 in 2022; $26,000 in 2020 and 2021) if age 50 or over; plus.
Your Retirement Savings Will Grow Faster
Assuming the stock market's average annual rate of return (11%), you could have more than $5 million in your 401(k) if you max out your contributions every year from age 30 to 60. And the vast majority of that money ($4.5 million) is all compound growth.
Is a 401K worth it anymore? ›
The value of 401(k) plans is based on the concept of dollar-cost averaging, but that's not always a reliable theory. Many 401(k) plans are expensive because of high administrative and record-keeping costs. Nonetheless, 401(k) plans are ultimately worth it for most people, depending on your retirement goals.
What's the average 401K balance by age? ›
Average and median 401(k) balance by age
| Age | Average Account Balance | Median Account Balance |
|---|
| 35-44 | $91,281 | $35,537 |
| 45-54 | $168,646 | $60,763 |
| 55-64 | $244,750 | $87,571 |
| 65+ | $272,588 | $88,488 |
3 more rowsAug 8, 2024
Deferring Social Security payments, rolling over old 401(k)s, setting up IRAs to avoid the mandatory 20% federal income tax, and keeping your capital gains taxes low are among the best strategies for reducing taxes on your 401(k) withdrawal.
What is the loophole to retire at 55? ›
The rule of 55 is a loophole that allows for early withdrawals from workplace retirement accounts. You must be 55 or older in the year you leave your job (for any reason) to qualify for early withdrawals from a 401(k) or 403(b).
At what age can I use my 401k without penalty? ›
Generally, if you take a distribution from a 401(k) before age 59½, you will likely owe: Federal income tax (taxed at your marginal tax rate). 10% penalty on the amount that you withdraw. Relevant state income tax.
Should I take my money out of my 401k now? ›
But that can start to fall apart if you use it like a bank account in the years preceding retirement. In general, it's a good idea to avoid tapping any retirement money until you've reached age 59½.
Should I cash out my 401k before economic collapse? ›
“Don't let a recession deter you from adding money into your 401(k). Don't let yourself make an emotional decision due to a recession or bear market.” Taking money out of the market during times of volatility can have the opposite effect of what you might be trying to accomplish in the long run.
Why is 401k not worth it anymore? ›
Tax Disadvantages of 401(k) Plans
401(k)s are taxed at higher earned income rates, as opposed to lower capital gains rates. You will find yourself paying capital gains taxes on other types of investments such as real estate and regular growth accounts.
Should I reduce my 401k contribution when the market is down? ›
One of the best things to do during a stock market crash or a low financial point is to stay the course and not reduce your 401(k) contributions. In fact, some believe a bear market is the right time to increase the percentage of income you funnel into your savings if you can afford it.
