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What to consider before stopping your 401(k) contributions
What to consider before stopping your 401(k) contributions
Updated over a week ago

If you do not wish to defer (contribute money from your paycheck) into your 401(k) or you are not in a financial position to do so, you can opt out and stop deferrals at any time.

However, here are some things to consider before making the change:

  • With other savings or investment accounts, you pay taxes on the money you’re saving and on any earnings gained in real time. In contrast, your pre-tax 401(k) deferrals are taken from your paycheck before taxes, and any earnings will grow tax-deferred. You won’t have to pay taxes on those gains until you receive distributions (withdraw) from the plan.

  • With other investment accounts, you will always pay taxes on any capital gains you earn for that year. With a Roth 401(k), as long as you meet certain requirements, your earnings will be distributed to you tax-free.

  • Pre-tax 401(k) deferrals can reduce your taxable income and lower the amount of income taxes you pay in the year you contribute to the plan.

  • Your 401(k) account assets are protected in the event of bankruptcy or judgment creditors.

  • 401(k) accounts have higher contribution limits than IRAs.

  • Your employer may offer an employer match or profit sharing contributions (which is essentially free money), which also won’t be taxed until you take a distribution.

Instead of opting out all together, you could choose to lower your deferral rate temporarily. Then, check in with yourself every few months to reassess your ability to contribute more.

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