Comments on: Should I Stop Contributing to My 401k to Pay Off Debt?

By: Jim

Jim — Tue, 06 Dec 2011 12:54:47 +0000

One other thing to think about: the money you invest in your 401k is tax deferred. Don’t put it in and you pay taxes on it, diminishing how much you invest. Even if the stock market is not doing well now, view that as an opportunity to buy more shares (i.e., buy low, sell high). This is a great buying opportunity, don’t miss it. However, if your debt is killing you, it’s always a good thing to be debt free.

By: Pete

Pete — Thu, 24 Feb 2011 03:54:12 +0000

I think that you should contribute to your 401k consistently, even during the debt reduction process. Debt reduction is about making up for lost time, and the best way to do this is to let compounding interest (time) in a 401k lead the way. http://www.petetheplanner.com/blog/2011/02/24/contributing-to-your-401k-when-you-are-in-debt/

By: Bdubs

Bdubs — Fri, 07 Jan 2011 17:24:48 +0000

Thank you for this article. This makes me feel better about reducing my 401K contribution to 1% for now. I still contribute a little, but I’m focusing on my debt. My employer stopped 401K matching, so it made more sense to pay off debt. I’m in my late 20s and hope to be out of debt by 30. Then I can bump up my contribution again. Good luck with your retirement!

By: Mark

Mark — Fri, 04 Dec 2009 16:57:41 +0000

@Tom Steele

Your math is correct but you cannot take a 401k “distribution” if you are still employed by the company. You can take a loan on the money but you have to pay it back.

By: ITguy

ITguy — Wed, 04 Mar 2009 16:40:42 +0000

Not only has my company eliminated my 401k match but they also took 3.5% of my pay a week ago. I’m at a point where if you look at how much money has been contributed is 20% higher then it’s current value.

I don’t want to stop contributing because I do believe that things will get better at some point in time but with the pay cut I kinda need the money that I lost since my pay cut. Would it be that bad to just lower my contribution as much as possible to help get through losing a percentage of my pay? That extra money help me get 80% out of credit card debt with but I still have some left that I am really wanting to get paid off but no longer can afford to make the larger payments that I was.

By: RC

RC — Thu, 26 Feb 2009 04:36:53 +0000

@edh- One thing to keep in my is that your 401k contributions are not tax-free but tax-deferred, which means you would pay taxes on your contributions and earned interest when you reach retirement age and started withdrawals. It would depend on what tax bracket you are in then compared to now of course. if you are in a lower bracket then than now, you could be paying more taxes.
Also, as you mention, you will not get the full amount of the contributions as you are being taxed on that money now if you reduce your contributions.
Depending on the amount and the interest rate on your mortgage, but more likely the HELOC, it may be a wise choice to try to pay down the HELOC.
It is probably a good idea to continue to contribute the amount for the company match, though.
Hope this helps!

By: edh

edh — Tue, 24 Feb 2009 17:32:46 +0000

how does this affect your taxes bc your take home pay will be higher. now you are getting taxed on the money you would have been putting into the 401k. this makes me wonder how worthwhile it is. i am planning to reduce to the amout my company matches. but then i have to take into account i am not really getting the full amount. fyi, my debt is mortgage and HELOC if that makes any difference.

By: RC

RC — Thu, 29 Jan 2009 04:00:05 +0000

@Mike-sounds like a good idea to me- I think keeping the 1% so you don’t have to wait when you restart is a good idea also- Good luck!

By: Mike

Mike — Wed, 28 Jan 2009 18:57:58 +0000

My employer just eliminated our company’s 401K match. That gave me the green light to reduce my contributions to 1% & use the money for my debt snowball. Initially was planning to stop all contributions to my 401K, but I would have to stop the plan & then restart at the next window. The convenience to immediately increase my 401K in the future was worth the 1% I was giving up paying off my debt.

By: To contribute or not to contribute? | Nothing But Net (Worth)

To contribute or not to contribute? | Nothing But Net (Worth) — Wed, 14 Jan 2009 16:11:33 +0000

[...] Should I Stop Contributing to My 401k to Pay Off Debt? [...]

By: Tom Steele

Tom Steele — Sat, 15 Nov 2008 20:22:33 +0000

I’ve been thinking about this as well.

What is wrong with this math?

You contribute 5% to your 401(k). Your employer matches it with 50 cents on the dollar.

Let’s make it easy and say you make 100k per year.

So you are contributing 5k per year. Your employer is matching with 2.5k per year. (I love this font!)

That is $7,500 per year that you are receiving, but you are putting in only $5,000 to get that money.

Now, if you cash it all out at the end of the year, you will collect $7,500 – 10% (750) = $6,750. You must pay income tax on this money now at your current rate.

However, no matter how you slice and dice it, you come out ahead putting into the 401(k).

Of course there is one caveat. If your 401(k) dropped during the year then this doesn’t work so well. But if you KNEW it was going to drop, you shouldn’t have put in at all, and we can never KNOW or we’d be so rich we wouldn’t need a 401(k) – right?

Depending on your plan rules, ideally you should contribute the max your employer matches, then take it out immediately after each paycheck.

Then you would be GUARANTEED a gain of 35% – right?

Please feel to correct me on what I’m missing if anyone sees something…

By: RC

RC — Sat, 11 Oct 2008 03:02:30 +0000

Unfortunately, it is pretty high, in the low 5 figures. I have thought about it, but with the large losses my 401k has taken, I think I am going to stick with trying to pay it down aggressively. But I do not think a 401k loan is as bad as some people do- it seems to have worked out pretty well for you so far.