Is it time to stop/greatly reduce 401K contributions?

[Disneefun]

Here's the problem. Dh's company just went through a massive layoff. The cut over half the staff. He's safe for now, but we don't really know whether the company will ultimately survive. There's been a lot of mismanagement and it will either fold or they will get their "stuff" together soon and fix the problems. Anything approaching the truth of the situation is hard to find right now. Given that two months ago they were singing the praises of how well they were doing and how things were going so great, I now know it was either a big delusion or an outright intentional lie. Anyway... I'll rant later.

We've always maxed out DH's 401K contributions. But now I'm thinking we might ought to stop or at least greatly reduce the amount so we can stockpile some more cash. We have a six month emergency fund and some other assets we could tap if we had to that should last a total of a year, if we were very careful, but the part of me that craves security would be happier with more liquid cash on hand if the whole thing goes down the toilet.

The rub on this is, if we stop contributing or reduce the contributions, come tax time next year we will owe, big time, assuming the company does not fail and DH continues to make his current salary. That 401K contribution keeps us in the lower tax bracket. Without it, we'll end up paying back much of our "saved" cash at tax time.

So I don't know which is the lesser evil: Reducing the contributions now to stockpile more cash on the chance the company fails and if it does not we owe out the wazoo, or keep contributing which reduces our tax burden but we forfeit the extra saved liquid cash if the company does go down.

We have no debt other than the mortgage and I'm in the process of going through all our expenses to pare down, just in case. I should be able to cut at least $100 more dollars off our monthly expenses with some phone calls. We're already pretty frugal and have our utility and grocery bills down to a science. I know in the end we'll be okay, I'm just flipping out.

 

[PinballFamily]

I could have written this exact post a year ago.

We did decide to not contribute to our 401k during 2009 (after maxing out every previous year since dirt was invented) and stockpiled the cash due to major job uncertainty. (Plus, in our case, the few 401k company investment options were ALL losing $ during the year - no tough decision here to sit on the sidelines for awhile.)

We made it and were able to put some of the diverted/saved $ into 2009 IRAs instead (maxes - just last week) so the tax hit wasn't nearly as bad as we feared. We were not tempted to spend the "extra" stockpiled money at all - we're disciplined enough to know what it was being saved for. 2010 is bringing other changes to us/our household and we will restart 401k contributions again soon, while still adding to our savings, too.

Good luck - sounds like you're really on top of this and will do what is best!

 

[minnie1928]

How about this...you stop the 401k and hoard the cash. If, in a year from now, things are looking much better then take that cash and put it in IRAs for you and him. That would help lower the tax bite, while still helping you feel secure in the mean time.

 

[hsmamato2]

Iras' or Roth ira's? that's Suze Ormans first place to save for later if not using a 401k for whatever reason....

 

[Swimalie]

I agree that if you decide not to put the money in to a tradition IRA and instead stock pile it for safety reasons and don't use it, at the end of the year, put it in a Roth IRA instead. Max that one out. Then you get the benefit of the retirement fund but also the safety net over the year.

Good luck. I hope the company gets its act together.

 

[BuzznBelle'smom]

Another vote for, stop the 401(k) contributions, stockpile, and then throw more money in an IRA later on, if you can.

You have until 4/15/2011 to put in an IRA and have it be tax-deductible for 2010. Depending on your circumstances/age, you may even be able to put extra into a regular IRA.

Also, I would consider a regular IRA versus a Roth, due to your potential tax liability. Roth is post-tax, so no deduction, but it benefits you down the line.

Now, this is a personal choice, but I prefer a regular IRA--I figure, I'd rather have the deduction now, than the promise of a dedeuction/benefit later. But, I don't trust the government--they'll tax anything, and as federal budgets get more dire, I suspect they'll be looking at those juicy, tax-free Roth withdrawals by the time I'm old enough to actually withdraw.

 

[Disneefun]

Thanks, all. We'd thought about the IRA thing, too but, when we put money into mine at the end of the year, it never seems to deliver the same tax reduction as the 401K because the max. allowable amounts are not as great as what he can deduct. 15% of his income is right at the maximum $16K allowed per year. Even if we both do IRA's we'd only be allowed 10K. Which does help reduce the tax burden, but not by as much. We'd still end up in that higher bracket. But, it is better than nothing so what I'm thinking at this point is to reduce his 401K down to about five percent and then IRA the rest. That might be enough to keep us in the lower bracket. At least it would severely limit the damage. Contributing enough to get the match no longer matters because the match went with the layoffs.

And I agree with the BuzznBelle. I've always done the traditional IRA b/c I want the deduction now, not to trust that the gov't will keep it tax free. Social security used to be tax free and now it's not.

 

[SuzanneSLO]

Does your DH get a company match for his 401k? If so, given how well you portray you finances (6 month emergency fund, etc.), I would continue to contribute at least to get the company match.

Remember that if the worse happens, you can pull money out of your IRA or his 401k; you just pay tax on it (the tax you would have paid if you never contirbuted) and pay a 10% penalty. The penalty may be scary, but is better than not being able to pay your mortgage or feed your kids if your DH is out of work for more than 6 months. Best of luck in your decision. -- Suzanne

 

[leight]

I'd contribute at least to full match. If his salary is enough that the 15% contribution level maxes him to $16k then it sounds like he is around 100k. Since you would start phasing out full deductible contributions to an IRA(at least for him since he has a 401k avail) at 89k for 2010- then it sounds like you wouldn't be able to fully take the 10k deduction if his income isn't lowered by the 401k contributions, so taxes could be an issue for you. I would continue as is for now- making the 401k contributions since you are already making the right steps in watching your spending and have enough to last a year if you watch every penny.

Good luck!

 

[ICF]

If company matches, then I would keep doing it.

If not, why not reduce his contribution by 1/2, thus giving you some extra emergency fund $$s, and still giving you some tax benefits??

 

[akcire]

I would continue to contribute to the 401K, you know all the reasons.

If something happens with his job, you use up your emergency fund (remember if unemployed you would get unemployment), and need extra cash....at that time you could always take a 401K loan.

 

[wdwfan16]

http://www.moolanomy.com/1132/2009-401k-and-ira-contribution-limits/

hase Out for Traditional IRA and Roth IRA

Please note that there are phase out limits depending on your income tax filing status, and you may not contribute up to the $5,000 maximum contribution limit. The phase out limits are based on your Modified Adjusted Gross Income (MAGI), which is calculated on your tax form. Roth IRA eligibility begins phasing out with a MAGI above $105,000 for single filers, and above $166,000 for married filing jointly. Single filers with a MAGI above $120,000 and married filing jointly with a MAGI above $176,000 are not eligible for Roth IRA contributions.

For Traditional IRA, the phase out begins at $53,000 and ends at $63,000 for single filers, and from $85,000 to $105,000 for married filing jointly. Please note that you can still contribute to a Traditional IRA if your MAGI is above the phase out limits; however, you will not be able to deduct your contributions for tax purpose.

 

[clutter]

I'd contribute enough to the 401 k to get any matching contributions from the company, then invest the rest after taxes. Remember, there will be withholding on the additional amount in his paycheck, so 1) it won't be dollar for dollar, and 2) it may reduce your tax bite. If not, adjust his W-4 to withhold some more.

 

[BuzznBelle'smom]

I would continue to contribute to the 401K, you know all the reasons.

If something happens with his job, you use up your emergency fund (remember if unemployed you would get unemployment), and need extra cash....at that time you could always take a 401K loan.

You ccan't take out a 401(k) loan if you're no longer employed. In fact, if you leave a job, you have to repay any outstanding loan within 60 days, I believe. You can, however, take a withdrawal--you would owe taxes and the 10% penalty.

 

[Pakey]

I don't know how your husband's company is set up but I'm the 401k administrator on our company's plan and our plan only allows employees to change their contribution amounts during open enrollment months (for us that is Jan and Jul). They can stop them completely at any time but can only make changes during those 2 months.

Based on how ours works, if it were me, I'd stop the contributions, stockpile the cash. If things looked better in July, I would restart my contributions, doubling them up, max out the year anyway. If things did not look better, I would just keep stockpiling on my own.