If you have a 401(k) account through your employer, it is never a good idea to stop contributing to it, even temporarily, if you can possibly avoid it. If you are experiencing a financial crisis of some sort, the solution is not to stop adding to your 401(k). The following are some important reasons to continue contributing to your 401(k), even in times of financial hardship.
Many employers will match the contributions you make to your plan. In many 401(k) plans, employers match employees dollar-for-dollar on the first 3% of the employee’s salary. An employee making $40,000 a year could get an additional $1,200, tax-deferred, simply by contributing the same amount to his or her 401(k). If you stop making contributions, you forfeit this money from your employer.
Your taxable income is reduced by the amount you contribute to your 401(k), so less is deducted from your paycheck for federal and state income taxes. If you choose to stop setting aside money in your 401(k), not only will you have less for retirement, but the government will take a bigger chunk of your check, and you will end up with less money to spend.
A 401(k) account can also provide long-term tax advantages. Over longer periods of time, the tax advantages a 401(k) provides can result in more wealth. If you stop contributing to your plan, you will lose the time value of money compounding that would have been yours if you had kept adding to the plan.
If you should ever have to declare bankruptcy, your 401(k) funds will be protected in most courts. While the rest of your assets are liquidated or reorganized in bankruptcy, your 401(k) account will remain untouchable. If you are in financial trouble, it would make more sense to put away as much money as you can in this safe account, away from the reach of creditors. If you have to start over, 401(k) investments creating passive income can help you get ahead of the game.
If you have established a 401(k) with your employer but you are now leaving the company, you will probably have several options as to how to how to proceed with your 401(k). Those choices may include:
If you withdraw retirement funds before the age of 59 ½, you will incur a 10% penalty from the IRS. Your 401(k) may constitute a large chunk of your retirement savings. It is important to weigh your options carefully and choose the one that works best for you. If you choose to leave your money with your employer’s plan, you will not be allowed to make any further contributions, and will probably not be allowed to take out a 401(k) loan.