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I am a 25 y/o US citizen working in the US for a US company. Given these days' hard times, my company has elected to suspend its 401k match. I make too much money to contribute to a Roth IRA. What is the most efficient thing to do with my money? Do I maintain my 401k contribution level, or cut it down and put the money elsewhere? My gut says to do this and put the extra money into an individual investment account, but my google searches yield mixed answers.

  • Is the suspension planned for a certain date? (If there is still time, you could try to put a larger chunk in before) – Aganju Aug 5 at 18:35
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    @Aganju the suspension is for a certain date but I can't modify how much they match. I have always contributed sufficiently to get the full the match. Contributing more myself won't increase the amount that is being put in by the company. – Runeaway3 Aug 5 at 18:58
  • Understood. Could have been there is more to match. – Aganju Aug 5 at 19:01
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    What do you mean by "extra money"? Do you mean an amount greater than what is required to get the full match? – Nosjack Aug 5 at 19:33
  • @Nosjack I mean, if I reduce my contribution, this is money that now goes into my pocket. This is the 'extra money'. The 'amount greater than what is required to get the full match' is not really a relevant number anymore since the match is going to be suspended. I go from contributing X% (and receiving an X% match) to contributing X% (and receiving 0% match). The "extra money" comes from no longer contributing X%, and instead contributing 0%. – Runeaway3 Aug 5 at 19:59
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Based on your comment, I see no reason to stop all contributions to your 401k except for the following reasons:

  1. Your investment choices in the 401k are horrendous (bad funds, high fees) or the account itself has high fees, to the point where a brokerage account would give you many (cheaper) options.
  2. You have high-interest debt or need to shore-up your emergency fund, as Pete said in his answer. A company that stops 401k matches might start laying people off...

If your 401k plan has good investment options, low fees, and you have no "hair on fire" debt, keep your 401k contributions the same. The 401k is still tax-advantaged, so putting the money in a brokerage account would essentially be the same thing except without the tax benefits.

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    +1 and agree with most of it. But. With no match, even a small expense, say, .5%, adds up fast. OP might be better off depositing to IRA and immediately converting to Roth. Or just staying post-tax, and taking advantage of low long term cap gains. (I realize this may be a small issue, but would ask for clarification on 'horrendous'.) – JTP - Apologise to Monica Aug 7 at 17:58
  • @JTP-ApologisetoMonica the fees are very small. Around 0.01%. No major issue there. The final question I must ask myself is when do I want these funds? Yes the 401k is tax advantaged, but its only for retirement. What if I want to buy a beach house when I'm 45? I need to take this into account as well, right? – Runeaway3 Aug 14 at 17:46
  • Of course. These questions typically have a narrow focus. And often assume facts not in evidence, such as other financial issue. Putting 100% of savings into the retirement account isn't really advised. Saving for vacation home 20 years in the future can be done in a non-retirement account. – JTP - Apologise to Monica Aug 14 at 17:56
  • @Runeaway3 Yes, of course. If this beach house is going to be your primary residence then you can take a loan from your 401k. But the vast majority of non-retirement expenses should be paid for from something other than retirement-designated accounts. – Nosjack Aug 17 at 12:20
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It depends much upon your plans for the future and other financial information.

My advice would be to make sure you are out of consumer debt and have a healthy emergency fund in place. You could direct the money, that you had been contributing to your 401K, to those purposes. It seems that your company is undergoing hard times and you may find yourself out of work soon so playing a bit of defense is never a bad idea.

If those things are taken care of you can probably still do a Roth. Look up "back door Roth" for a way to get around the income limitations for Roth contributions. If you want to contribute more than 6K, or you don't want to do a back door, you could just open a taxable brokerage account.

While you will pay taxes on the income you put into a taxable account, and income earned in that brokerage account you can limit this by using mutual funds that spin off little or no cash, or using a buy and hold strategy for single stocks. A boring old S&P 500 fund spins off very little cash so they tend to be very tax efficient while their appreciation can be much larger. Taxes will be due when you sell, but that could be years down the road.

There is always the option to continue to contribute to the 401K. Many people contribute well above the percentage to get a match and it is so painless and simple to use a 401K, which is essentially the same thing. There is something to be said about the simplicity of just continuing to use your 401K if you are happy with the fund choices and fees.

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    I appreciate the explanation here; I am indeed in a secure defensive position, so there is no need to funnel funds to emergency or reducing consumer debt. The remaining options are what I had considered. Ever the optimization-minded engineer that I am, I am wondering which if these choices is best from a return perspective. If they are all roughly equivalent, I will obviously need to choose the one that best fits my goals from a tax perspective, but I am asking here if there is a clear winner from an ROI - tax consideration – Runeaway3 Aug 5 at 20:03
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    @Runeaway3 you can't know which is best from a return perspective as you cannot predict the future returns. Frankly, it does not really matter because the results will be similar enough that other factors will have a more profound effect. It is tough for an engineer to understand but sometimes optimizing efficiency is not the best choice. – Pete B. Aug 6 at 10:05
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Since you’re keen on investing in a Roth, we certainly don’t need to convince you of the value of retirement savings. Any chance you could pass the word on to me at age 25? (which unfortunately was a while ago :)

I hope it’s also unnecessary to talk about the wisdom of an emergency fund; obviously that is the #1 priority. You can’t count on “borrowing” from a 401K because that only works while you remain in that employment. Also, there’s something to be said for reducing debt, but if you’re already happy with your 401K investment plan, I don’t have a reason to doubt you.


I definitely agree a Roth is more favorable than a plain 401K for a number of non-fiduciary reasons (and some fiduciary ones but they’re subtle and complicated). There are a couple ways to get there.

First, talk to your 401K provider about a Roth 401K. Yeah, that’s a thing; but it’s not a thing for everyone in every plan.

Second, as Pete discusses, you can use the “Roth Backdoor” - contribute to a Traditional IRA but don’t take the tax deduction; this is called a Non-Deductible IRA. Then you do a “Convert to Roth”; and the amount of the contribution isn’t taxed because it was already taxed.

  • However, if you already have traditional IRAs, the Backdoor Roth has a big problem. You can’t pick and choose which IRAs to convert; you must convert them all in proportion. So if you had $12k of existing IRA and you backdoor’d $6k of new NDIRA, you’d convert $4k of the existing IRA and $2k of the new NDIRA, and have to pay taxes on the $4k. Weirder, you carryforward $4k worth of ND (tax already paid) status on the remaining IRA which then comes out in proportion - hey I competed in national-level math competitions, and this give me headaches!

There used to be a question of the legality of the Roth Backdoor. Some argued it was a glitch. But documents have recently surfaced that reveal Congress considers it intentional and IRS considers it business as usual.

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Real world performance on investments is largely a matter of avoiding biases, being ok with meeting rather than beating the benchmarks, and resisting the urge to act in response to what's happening at the moment. Choose how you save based on what helps you consistently set money aside on a sustainable basis, resist playing with it, and keeps ongoing costs (fees & service charges) low.

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If you have a mortgage or other debts, the best use of your money is to pay them off. Don't forget that a mortgage is a debt. Credit cards and other loans first, of course, because they have the highest interest.

But after that, the interest you pay on a mortgage is guaranteed to be more than you could earn from any bank account. Remember that for the bank to break even, the interest on mortgages and other loans has to pay for the interest on savings plus the bank's own administration overheads, so the interest paid on savings (even 401K) inevitably has to be lower than the interest charged on all loans.

The reason "match" funding from a company makes that scheme advantageous is that the margin between interest paid and interest charged is less than 100%. The extra funding from the company more than covers that margin, making it a good use of your money. Take away that "match" funding, and even with tax relief you're losing ground overall.

Of course this depends on the terms of your mortgage. Some may limit the amount you can repay at any one time or in any one year, so you would need to check the details. It also assumes you do have a mortgage - if you don't then it naturally doesn't apply to you.

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    Really? Are you sure you the mortgage interest is higher than the investment gains in an IRA? Or the market for that matter? Seems like a debt-phobic answer. – Harper - Reinstate Monica Aug 6 at 15:16
  • @Harper Look it up for your mortgage. And thinking previously, if this wasn't the case then a mortgage/invest cycle would be an infinite money source. There's nothing wrong with debt, but it always has a cost. For mortgages, that's the near-invisible cost of how long you're paying it off over, and the extra interest every day of that time. Reduce the principal, reduce the time, pay less interest over the course of the mortgage. – Graham Aug 6 at 15:26
  • I think you have a mistake the interest you pay on a mortgage is guaranteed to be less than you could earn from any bank account. Mortgages over the past 20 or so years have ranged 2.5% - 7.5% and no bank has paid over 2% interest. Maybe you mixed up your wording? – AbraCadaver Aug 6 at 16:53
  • so the interest paid on savings (even 401K) inevitably has to be lower than the interest charged on all loans What? No, the bank has no control over what stocks and mutual funds do and they are not paying the gains. Maybe you are thinking of a Money Market account and not a 401K? – AbraCadaver Aug 6 at 16:57
  • You might be thinking of IRAs that only contain CDs, or a 401k that defaults to a money market fund. Any reasonably diversified stock fund (VOO, SWPPX) will earn much more than any mortgage interest rate. – Nosjack Aug 6 at 21:06

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