While the U.S. death toll from the coronavirus pandemic as
of this writing is a bit over 125,000, and hundreds of thousands more have been
sickened by it, its financial impact has been felt by many more than that. Millions have lost their job or seen their
business—perhaps the dream of a lifetime—fall victim to the disease and the
national response to it.
Even among those of us fortunate enough to keep our
employment, some have had wages or hours reduced; and work routines have
definitely changed. One of the more
common responses among companies strapped for cash due to the national health
emergency has been to suspend matching contributions to workplace retirement
plans like 401(k) accounts.
This is especially unfortunate because it deprives workers of
an opportunity to purchase more stocks, mutual funds, etc. at the very time
when they have gone down in price and become relative bargains. The same dollar amount of contributions and
company match would have purchased perhaps 33% more investment assets in April
than in February…if only the employee had kept contributing (many didn’t) and
the employer had matched it. That’s the
whole idea of “dollar cost averaging”.
So what if your employer has stopped matching your
retirement contribution? Should you
continue to sock money into the account?
Saving money for retirement at any stage in life is hardly
ever a bad decision. It’s a no-brainer
when the company matches your money. Who
in their right mind would turn down what amounts to free money? Even when the match disappears, continuing to
contribute on your own (assuming you are not in financial crisis mode) is a
good idea. But should it go into the
company retirement plan? That’s where it
gets a little tricky.
Personally, since my new employer is halting contributions,
I’m going to funnel my money mostly to a Roth IRA. By doing so, I will not be losing matching
funds and will be funding an account that will give me a tax-free income source
in retirement. Yes, I will lose the tax
deduction this year. Yes, I am late in
my career and will miss out on the years of non-taxable growth in the value of
the investment which is the main attraction of a Roth account. Nevertheless, leaving that account to grow
for just a few years before tapping it will give me a source of income in my
retirement years that will not increase my adjusted gross income, helping save
my Social Security benefits from taxation.
Retirement planning, after all, involves tax planning. Moreover, many financial advisors are telling
their clients that tax rates are certain to rise in coming years to pay for the
government expenditures for the coronavirus relief package (trillions of
dollars). Pay taxes, they urge, at
today’s low rate on the money put into a Roth account now so it won’t be taxed
at much higher rates upon withdrawal in retirement if put into a non-Roth
account.
But my decision is not the right one for every employee. For instance, a high-income family may have many
tax deductions reduced or even unavailable to it. The tax deduction of a 401(k) account (with
its annual employee contribution limit of $19,500, or $26,000 if over age 50)
might be the single biggest tax break they have and could be worth more as a
current deduction than tax-free income in retirement. Of course, there are income limits that might
prohibit them from contributing to a Roth IRA, but there is no such restriction
on contributing to a Roth 401(k), if available.
But even folks of modest means might be better served by continuing
to make contributions to a non-Roth account.
Remember, such contributions are tax deductible in the year they are
contributed. If someone is saddled with
student loans and is seeking relief in the form of an income-adjusted payment,
contributing to such an account lowers their adjusted gross income on which their
payment is calculated. The same would
apply to someone buying health insurance on the public exchange. Deductible retirement plan contributions will
lower the modified adjusted gross income used to figure eligibility for federal
subsidies.
It pays to know the rules of your company retirement
plan. If you stop contributing
altogether, will that mean that you will lose out on other employer
contributions besides the company match—money like Safe Harbor
contributions? Large employers have to
adhere to certain standards and meet stringent tests to have their plans
certified. I am not an expert on these
very complicated rules, but it would make sense to learn more about your own
employer’s defined contribution plan (like a 401(k)) so you do not
inadvertently cheat yourself out of “free money” from your employer. Over 70% of the money in my 401(k) is
attributable to the employer’s contributions and the growth on that money (it
includes profit sharing, match, and Safe Harbor money). Don’t walk away from that that kind of money by forgetting to re-start
your contributions if your employer restarts theirs. Keep an eye on your accounts!
Until next time,
Roger
"Therefore keep watch, because you do not know the day or the hour." Matthew 25:13
NIV®*
*Scripture quotations taken from the Holy Bible, New International Version® NIV®
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