What are pros/cons of having 401K contribution taken out of retro pay?

Question

I am due retro pay for 6 month at my workplace. It is about two thousand. I was asked if I want my 401K contribution taken out of my retro pay.

What does that mean for me?

• Will it be more money for me now if I don't take it out?
• Will it be more money for my retirement if I do?

For all intents and purposes, is there a preferred answer to this or do I flip a coin?

Note: my workplace has a matching fund program.

Answer 1

Will it be more money for me now if I don't take it out?

Yes

Will it be more money for for my retirement if I do?

Yes

The difference will be the existence of a match and tax-deferral. If there is a match then you will have an instant 100% gain on the amount that is matched.

From a tax standpoint, putting some in your 401(k) now will reduce your taxes this year - you will instead pay tax when you withdraw the money at retirement (the withdrawal will be considered "income" at that time).

Other decision points:

• Are you saving for retirement now? If not, when do you plan to start?
• Do you have better uses for the money (pay off debts, etc.)

If there is no match, but you still want to add to retirement savings, then you could alternatively put the money in an IRA, which will give you more control over your investments than a 401(k) (which could be good or bad, depending on how investment savvy you are).