4 Easy Ways To Never Stop Contributing To Your 401K  

It’s easy to become overwhelmed by cashflow decisions, especially when you come under financial pressure.

Times like those can seem opportune moments to start dipping into your 401(k).

Many baby boomers who have savings and investments in a 401(k) are tempted to dip into the fund in times of hardship. Doing so, they become liable for taxation by both state and federal government. That’s less money for you when you retire because of less investment over the intervening years, and less money available to you today because you will also lose out on your employer matching contributions.

That’s a double blow.

It’s important to remember that in case of a bankruptcy, most courts won’t touch your retirement account. That’s one of the most feared consequences taken care of.

While stock brokerage is attractive, compound interest on your 401(k) can often result in much greater financial rewards. Your 401(k) is taxed after payout, so it has had the chance to accrue value over many years before you pay an income tax on it. This alone is benefit enough to maintain regular contributions.    

Many are put off even starting a retirement plan and don’t take part at all.

The main reason many people don’t take part in a company 401(k) plan is the immediate impact on their take home pay. They feel that it’s not the right time to start making that kind of investment; a better time will come when they have more money or less expenses. But this is not the right way to think about such an important investment in your future.

It’s not difficult to start a plan that allows you live your life and maintain regular contributions without ever having to worry about taking money from the account, barring extreme circumstances.

So let’s tackle that!

Start at 1%  of your paycheck and adjust your lifestyle expenses as you go.

Almost everyone can do without 1% of their paycheck.

1. start off small – match your paycheck as it increases
2. opt for a target date fund if you want to take action but just don’t understand how 401(k)s work – they are a safe way to get involved until you have the time or inclination to understand more
3. Always make use of the company matching program – psychologically it’s much more difficult to pull out when you know you will lose so much.
4. Push up your contributions 1% at a time on a regular basis so that you become accustomed to what you are allowing yourself as disposable income.
5. Never borrow against your 401k

Understanding how to manage your 401(k) will also help you see how valuable it can be to you as a tax shelter, which psychologically helps you to stop seeing it as money to tap into if you are tempted.

In some cases, it’s also possible to convert your 401(k) into a Roth IRA after the age of 59.5 and so avoid tax.

You should now understand why taking money out of your 401(k) early can be costly in the long term, and how just 1% on a target date fund can get you started without any great investment of time or money on your behalf.

You should also understand that there are great tax benefits to holding on to your 401(k) and that it may be possible to avoid almost all tax, depending on how your company manages the 401(k).

What to do next:

Ask your employer about setting up a target date fund.

Check with them if they allow money in your 401(k) to be redesignated into Roth money while keeping it in your 401(k) when you reach 59.5.

When you approach 59.5, open a Roth IRA to move the 401(k) into so as to avoid tax.

Sweet!