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Bankrate.com |
Even unmatched 401(k)s are worthwhile Dear Money Matters,
My employer does not match 401(k) contributions. Do you feel it's worth contributing when this is the case? I've heard financial planners say no, because the amount of taxes that need to be paid when the money is withdrawn is offset by the employer's contribution.
Diane Dear Diane,
Not to chastise an entire profession, but any financial planner who suggests that a 401(k) isn't worthwhile just because there's no employer match should whack themselves upside the head with their bulky calculators until they rattle more sense into their brains.
Granted, not having an employer match for your 401(k) program isn't great news, but there are plenty other compelling reasons to continue to take part in your 401(k). And, akin to some planners' rationale that taxes nix 401(k) participation, it's the numbers that argue in favor of funding your 401(k) to the absolute max. Here's how it works: As you probably know, all 401(k) contributions take place before you receive them as income. That, in effect, is a generous return unto itself, since you're not paying taxes on funds that you're putting to work for you immediately. Add to that any return that your 401(k) plan earns, and the overall payback increases all the more. Here's a scenario to amplify what I just tried to explain. Say you're in the 27 percent tax bracket. Every time you earmark money from your salary for your 401(k), you're effectively earning a 27 percent return right off the bat since you're skirting taxes on that income. Add on any applicable state income taxes and your return increases all the more -- all with nothing in return from whatever investment vehicle you've chosen for your 401(k). Granted, critics of no-match 401(k)s have a point in that you will have to pay taxes once you start withdrawing your money. However, that argument overlooks a couple of salient points. For one thing, your 401(k) will likely grow in value over the course of many years -- in turn, that will likely more than offset the tax liability once you start accessing the account. Indeed, the argument of tax liability seems to me a moot one -- if you're concerned about paying taxes on profits you've accumulated, why invest at all? Another point that's glossed over somewhat is your tax bracket. One of the central elements of tax-deferred investing for retirement is that, in theory, once you retire and start pulling money from retirement accounts, you may well be in a lower tax bracket than you are now when you're working and earning an income. That makes a world of sense -- what would you rather do, get socked with taxes now at a higher rate or stow the money away and take a lighter hit when your bracket has dropped? So I would urge you to keep funding your 401(k) as much as possible. And, for what it's worth, you may try lobbying your firm's managers to see if you can't win them over to the idea of some sort of match, however modest. In this era when compensation in varied forms is critical to hiring and keeping top employees, an increasing number of companies are coming to realize that a solid 401(k) plan can be just as attractive as a competitive salary and other benefits. |