Do You Always Benefit From Maxing Your 401k Contribution Limits?
Before you answer that question you need to review your personal financial circumstances and goals. There are situations when maxing out your 401k contribution limits will be of great financial benefit to you; however, other situations may be a financial setback. Here are 3 situations when you are better off withholding your 401k contributions.
#1 – Living Paycheck To Paycheck
If you are living paycheck to paycheck with no back up a good financial move would be to stop your 401k contributions until you have established an emergency fund equal to six months of income. This emergency fund is your back-up for unexpected financial events. The true value of this emergency account is when it is only used for true emergencies such as paying expenses during an unexpected job loss or for medical emergencies. If you use the money for everyday living expenses due to overspending, then work on your spending habits go back to making your 401k contributions.
#2 – Drowning In Debt
If your debt costs you more than your 401k accounts are earning, you are going financially backwards instead forwards. Stop, step back. If you are paying 19% interest on some credit card debt while your 401k earns you 5% stop your 401k contribution limits until you pay down some of that debt. Paying out more than you are earning on your investment is not getting you ahead and the purpose of contributing to your 401k is to get you ahead.
#3 – No Matching
Some financial experts say that if your employer does not match your 401k contribution limits you should skip investing into a 401k altogether. Let’s analyze this. If your employer does match, you have an emergency fund and you are not drowning in debt then you absolutely should max out your 401k contribution limits.
If your employer does not match does that mean you never plan on retiring? Of course not, so why should an employer match determine whether or not you max out your 401k or not? An employer match should not be the determining factor on whether you max out your 401k account. The determining factor should be whether you want to make contributions to an investment that offers tax-deferral benefits and will be there when you decide to stop working someday.