Why maximize a 401k without an employer match?
When an employer matches your contributions to a 401(k), it represents one of the best retirement savings opportunities out there. Not only does matching effectively double your contribution amount up to your employer’s matching limit, but employer contributions also don’t count toward your annual 401(k) contribution limit. But matching is optional, and some employers don’t do it. Even if your employer doesn’t offer a match, there are still plenty of good reasons to max out your 401(k) every year. A financial advisor can help you evaluate your retirement saving options.
Employer Correspondence Basics
If an employer match sounds like free money, that’s because it is. When an employer offers a 401(k) match, they agree to contribute $1 to your account for every dollar you save.
Of course, employers may not match every single dollar you set aside. For example, if you’re diverting 6% of your salary into your 401(k), your employer may choose to pay you only half, up to 3% of your salary. This is a consideration that can limit the value of an employer match.
However, the employer match does not count towards the 401(k) annual contribution limit. For 2023, this elective deferral cap is $22,500. For example, if you earn $100,000 and your job offers a 3% match, your total contribution in 2023 (including your employer’s match) would be $25,500. But keep in mind that the IRS imposes a limit on how much you and your employer can contribute to your 401(k) in any given year. In 2023, 401(k) contributions cannot exceed $66,000.
One thing to keep in mind is that employer matching is strictly voluntary. Employers can match, but they don’t have to. Fortunately, almost everyone does. According to Vanguard’s 2022 “How America Saves” report, 95 percent of the plans she oversaw offered employer meetings in 2021. So this is not something you might run into.
Why you should maximize your 401(k) without an employer match
Why maximize a 401k without an employer match?
Today, the work of saving for retirement falls largely on the shoulders of the employee. Many employers make it easy to save by offering company-sponsored retirement plans, but they don’t guarantee retirement benefits. So one of the main reasons to maximize your 401(k) contribution even in the absence of an employer match is that you’ll likely need this money when you stop working. If you save nothing, Social Security benefits may be all you have to fall back on.
In addition to this stark reality about your future retirement, here are a few more reasons to max out your 401(k) even if your employer doesn’t match:
Tax benefits. Saving in a 401(k) offers tax benefits now, as well as in the future. Every dollar you defer now reduces your taxable income for the current year and lowers your tax liability. At the same time, income taxes on any gains from investments you make in your 401(k) are also deferred until you withdraw them.
Higher contribution limit. 401(k) have a higher limit on contributions — $22,500 — than the other major retirement savings option, an individual retirement account (IRA). For 2023, the IRS caps contributions to IRAs at $6,500. That’s $16,000 short of the 401(k) limit. So a 401(k) saves you a lot more.
Convenience. Payroll deferment to a 401(k) is also much easier and more cost-effective than starting a rollover into an IRA. Because 401(k) contributions automatically flow out of your paycheck without you having to do anything, saving into a 401(k) can be much easier than making manual contributions to another savings vehicle.
Legal protection. The money in your 401(k) is legally protected from creditors. If worst comes to worst and you have to file for bankruptcy protection, the people and organizations you owe money to can’t come after your 401(k). This is not true for most other accounts.
Why you shouldn’t max out your 401(k) without an employer match
Why maximize a 401k without an employer match?
It may not always be the best idea to max out a 401(k) when an employer doesn’t match. For example, 401(k) fees vary widely. The fees charged by 401(k) plans, just like mutual fund expense ratios, can have a large effect on investment performance. If your employer’s 401(k) plan charges high fees in addition to not offering a match, it may be best to put your retirement funds elsewhere.
Here are a few other reasons why you potentially wouldn’t want to max out your 401(k):
Fewer investment options. Many 401(k) plans offer a limited number of investment options and may have only a handful of target date funds. If your investment needs don’t match the options available, a maximum contribution may not be the best approach.
You change jobs often. People who change jobs often might be better off saving into an IRA than using a plan tied to a specific employer. It’s generally not the best approach to have many retirement accounts because it can make keeping track of everything complicated.
You have other financial goals. There may be other things in your life that are more important than retirement at this point. For example, most advisers suggest setting up an emergency fund of about three months of out-of-pocket expenses in a secure, easily accessible account. A 401(k) is for long-term savings — you’ll usually pay a penalty if you withdraw 401(k) funds before age 59½ — so it’s not suitable for emergency funds. Other goals that may take precedence include saving for a down payment on a house or paying off student loans.
Bottom line
Even when an employer doesn’t match 401(k) contributions, there are still good reasons to contribute the maximum amount allowed in a given year. Contributions to a 401(k) provide tax benefits now, as well as later. You can also contribute much more to a 401(k) than to an IRA. However, in some cases, it may be wiser to contribute less than the maximum if your employer doesn’t match, especially if the 401(k) plan has high fees and mediocre investment options.
Retirement planning tips
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A financial advisor can help you navigate the confusion of deciding how to save for retirement. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can interview your advisors at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you reach your financial goals, get started now.
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SmartAsset’s retirement calculator is a quick, easy and free way to get an idea of how to prepare for a comfortable retirement. Using your location, income, age and projected retirement expenses, our tool will provide instant answers to questions about how big your retirement nest egg should be and how much you need to save to get there.
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