Saturday, June 27, 2020

So Your Employer Cut Back Your 401(k)

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,

"Therefore keep watch, because you do not know the day or the hour." Matthew 25:13

*Scripture quotations taken from the Holy Bible, New International Version® NIV®
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